The relationship between stock repurchase completion rates, firm reputation and financial reporting quality: a commitment-trust theory perspective

Abstract

In this study, we examine firms' commitment to stock repurchase announcements as a proxy for trust within the investing community. Using a commitment-trust theory perspective, we show that firms with higher repurchase (share buyback) completion rates have higher financial reporting quality. We proxy financial reporting quality using a composite measure of financial reporting aggressiveness and also using management’s propensity to meet or beat analysts' expectations. These firms mitigate (enhance) the negative (positive) effect of repurchases on financial reporting quality. Higher completion rates mitigate the negative effect of accretive stock repurchase on financial reporting quality. Further results show that higher corporate governance and financial constraints dampen this relationship between completion rates and financial reporting quality. Our results, which are robust to various sensitivity tests, indicate that higher stock repurchase completion rates reflect good business morality and a firm’s commitment to its investors, as exhibited by higher financial reporting quality.

Publication Title

Accounting and Finance

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