ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Ownership of Stock Repurchasing Firms and Earnings Management

  • ChoiJungHo Hongik University
  • JUNG SUNG CHANG Chonnam National University

Asian Tax Journal Vol. 13 No. 3 (2012), pp. 53-82

Abstract

The purpose of this research is to examine the relationship between ownership structure and earnings management based upon the managers' opportunism associated with stock repurchases. Namely, in this study, we empirically investigated into whether managers whose company stocks are largely owned by major shareholders have incentives to manipulate earnings surrounding when the firms repurchase their own stocks in the open market. Especially, we made an attempt to examine whether firm managers manipulate earnings in different manners around stock repurchases and those earnings management behavior is related to major shareholders' ownership, and how investors evaluate this phenomenon in the stock markets. This study report the following evidence. Managers did not opportunistically manipulate earnings to boost or lower the stock price around stock repurchases. We also could not find the evidence to support the research hypothesis that earnings manipulation surrounding stock repurchases is influenced by major shareholder ownership. However, we found that firms whose shares are largely owned by major shareholders manipulate earnings upward in the stock repurchase year and may opportunistically utilize the stock repurchase chance to misrepresent firm performance. We also report that discretionary accruals reported by the stock repurchase firms did not have information value in the stock market, and this results is not influenced by the extant of major shareholders ownership. This study is different from the extant literature in that we examine manager's motivation of stock repurchases from the view point of ownership structure, unlike the past studies which mainly focused on the undervaluation hypothesis. This study also made an attempt to investigate into earnings management around stock repurchases and to report more detailed evidence on the stock repurchase motivation. The results of this may contribute to the investors' rational decision makings and the development of stock market.

Keywords

  • stock repurchase
  • earnings management
  • discretionary accruals
  • value relevance

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