WHY DO FIRMS CHOOSE ACCELERATED SHARE REPURCHASES OVER OPEN MARKET SHARE REPURCHASES?

Abstract

We investigate the motivations behind why firms increasingly choose to carry out accelerated share repurchases (ASRs) over open market repurchases (OMRs) and compare these with motivations behind repurchasing stock in general. Using a logit model, we find that firms carry out ASRs over OMRs to distribute excess cash, increase earnings per share, and increase bonus-linked management compensation. We find little evidence that undervaluation, payout policies, and capital structure are significant drivers of ASRs. On the other hand, using a tobit model, we find that firms repurchase stock to distribute excess capital, signal undervaluation to shareholders, optimize capital structure, and offset share dilution. Our empirical work, thus, suggests that motivations to carry out ASRs differ from those to carry out share repurchases at large. These results are robust to using alternative comparable models and to various data decisions made in our study. Consistent with theories of managerial myopia, we find that management tends to choose ASRs over OMRs because ASRs can increase their bonus compensation in the short-term.