Accretive Share Repurchases and Equity Vesting

Sammanfattning: We investigate the connection between the discontinuous probability of making accretive repurchases around the zero EPS surprise threshold and the sensitivity of upcoming CEO equity compensation value to the underlying stock price. Our study is performed using data from S&P 1,500 companies between 2006-2015. Following Almeida et al. (2016), we adjust reported EPS to its pre-repurchase equivalent, and find a discontinuous probability of making accretive repurchases when the pre-repurchase EPS is below the median analyst EPS forecast. Constructing the CEO sensitivity measure following Edmans et al. (2013), our results show that the discontinuity increases as CEO sensitivity goes up. These results suggest that accretive repurchases are a plausible explanatory mechanism for the results of Edmans et al. (2013), who found a correlation between high CEO sensitivity and beating analyst estimates. Our findings suggest that high sensitivity of a CEO's equity-based compensation to underlying share price increases the prevalence of accretive share repurchases in order to meet analyst forecasts, highlighting the need for further research into potential adverse effects of such repurchases on long-term company performance.