Both post-repurchase abnormal returns and reported improvement in operating per-formance are driven, at least in part, by pre-repurchase downward earnings manage-ment rather than genuine growth in profitability. The downward earnings manage-ment increases with both the percentage of the company that managers repurchase and CEO ownership. Pre-repurchase abnormal accruals are also negatively associ-ated with future performance, with the association driven mainly by those firms that report the largest income-decreasing abnormal accruals. The study suggests that one reason firms experience post-repurchase abnormal returns is that post-repurchase realized earnings growth exceeds expectations formed on the basis of pre-repurchase deflated earnings numbers. The last two decades have seen a proliferation of stock repurchases. According to Stefan Selig, vice-chairman of Banc of America Securities, “[r]epurchasing stock is one of the most frequently discussed corporate finance topics in board-rooms today ” (Business Week Online, November 29, 2004). The increasing importance of repurchases in corporate payout policy has stimulated a consid-erable amount of academic research. However, the evidence on long-term op-erating and stock performance after repurchases remains largely unexplained. Further, although many well-documented anomalies seem to have disappeared in recent years (see Schwert (2003)), Peyer and Vermaelen (2006) find that long-term post-repurchase abnormal returns still persist. It is, therefore, important to explore potential explanations for the superior stock performance following repurchases. Prior studies find that firms manage their reported earnings prior to corpo-rate events such as management buyouts (Perry and Williams (1994)), initial public offerings (IPOs) (Teoh, Welch, and Wong (1998a)), seasoned public of-ferings (SEOs) (Teoh, Welch, and Wong (1998b) and Shivakumar (2000)), and stock-for-stock mergers (Erickson and Wang (1999) and Louis (2004)). Extant studies also find that long-term abnormal returns are negatively associated with (abnormal) accruals (Sloan (1996) and Xie (2001)) and that long-term stock

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We theoretically and empirically explore the interaction between repurchases and insider trading as signaling devices about private information on firm valuation. Our theory predicts that repurchases, when coupled with insider buying, further the signal of firm undervaluation; insider selling signals the opposite. We find that for the following quarter, repurchases generate 1.2% abnormal returns on average, while repurchase with net insider buying generate 3.7 % abnormal returns, an increase of 2.5%. While coupled with insider selling, the abnormal returns are not discernable, implying strong negative insider seller effects. The implications that insider trading augments or attenuates the signal sent by share repurchases. JEL No. G14, G35

Influencing the number: the relation between accrual-based earnings management and stock repurchases

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