The Real Effects of Share Repurchases∗

We employ a regression discontinuity design to identify the real effects of share repurchases on other firm outcomes. The probability of share repurchases that increase earnings per share (EPS) is sharply higher for firms that would have just missed the EPS forecast in the absence of the repurchase, when compared with firms that “just beat” the EPS forecast. We use this discontinuity to show that EPS-motivated repurchases are associated with reductions in employment and investment, and a decrease in cash holdings in the four quarters following the repurchase. Stock returns and future profitability of firms that change the sign of their earnings surprises from negative to positive using repurchases are on average similar to those of firms that surprise positively without conducting repurchases. However, valuation and performance consequences of EPS-motivated repurchases are more negative for firms that cut real variables, in particular R&D and employment. Our evidence suggests that managers are willing to trade off investments and employment for stock repurchases that allow them to meet analyst EPS forecasts. ∗We thank seminar participants at the University of Illinois at Urbana-Champaign, 2013 London Business School Summer Symposium, 2013 WFA, 2013 China International Conference in Finance, 2013 EFA, 2014 NFA, as well as Azizjon Alimov (discussant), Pablo Moran (discussant), Urs Peyer (discussant), Zach Sautner (discussant), Roni Michaely, Marina Niessner, Jacob Oded, and Kelly Shue for helpful comments. Almeida: [email protected]; Fos: [email protected]; Kronlund: [email protected]