Both post‐repurchase abnormal returns and reported improvement in operating performance are driven, at least in part, by pre‐repurchase downward earnings management rather than genuine growth in profitability. The downward earnings management increases with both the percentage of the company that managers repurchase and CEO ownership. Pre‐repurchase abnormal accruals are also negatively associated 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

During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three‐year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications