Do Managers Provide Misleading Earnings Guidance Before Stock Repurchases?

Abstract

We point out several methodological flaws in previous research that concludes that managers mislead shareholders into selling their stock for too cheap by releasing overly negative information before stock repurchases. In particular, this research relies primarily on measured market reaction to management guidance which suffers from endogeneity concerns. Using a sample of 3,181 repurchase firms and matching rival firms during 2003-2012, we find insignificant differences between their frequencies of management guidance, the implied earnings updates, and the closeness of earnings guidance to actual earnings. In contrast, there is a significant difference in market reaction to guidance, which is 1.5% lower for repurchase firms than for rival firms after accounting for differences in earnings updates and other information. Our evidence suggests that repurchases occur in response to investor misreaction to management guidance, but we find no evidence to suggest that managers mislead investors before this dominant form of shareholder returns.