The current study adds consideration of a $1.7 billion accelerated stock repurchase (ASR) by Hewlett-Packard (HP) to a recent analysis of 2006-2007 ASRs by Applied Materials, Cypress Semiconductor, Linear Technology, and Xilinx. The HP addition to company case studies leaves fundamental findings on ASRs unchanged including: 1) Liability (ASRs are denied a 10b-18 safe harbor) 2) Disturbing, pre-deal, stock activity (prices rise 10% pre-deal) 3) Idiosyncratic, incomplete, and sometimes misleading disclosures 4) Inferior risk/reward relative to alternatives. Studied ASRs all share these drawbacks. That does not prevent some from being profitable. Profitability depends on post deal stock performance rather than liability exposure, governance quality, or disclosure transparency. Still, regardless of profitability, ASRs are found to provide lower returns compared to simpler and/or less risky alternatives. So, why have ASRs grown in popularity in recent years? Other than sympathetic accounting, no satisfactory explanation is found or hypothesized. HP's ASR reinforces the view that cosmetic accounting rather than economics attracts companies to ASRs. In published interviews, HP managers explain their goal: A deal to smoothly offset anticipated options dilution without incurring a reported profit, loss or fee. HP's ASR achieves that goal. Like other ASRs, HP's requires no income statement recognition. Absent any income accounting, HP's banker and counterparty, BNP Paribas, is free to report that HP "probably saved over $100 million." However, we calculate, to the contrary, that the $1.7 billion transaction costs HP and its ongoing shareholders at least $115 million (6.7%) while exposing HP to unnecessary liability. Whether ASRs facilitate efficient execution of large buybacks with superior governance may be an open question. Arguably, equity accounting for options and buybacks should be revisited. But, as ASRs become a larger proportion of total buybacks, the need for better disclosure seems a modest, reasonable and necessary start.
{"title":"Accelerated Stock Repurchase Programs: Underreported and Overpriced? Part II (Hewlett-Packard Addendum)","authors":"M. Gumport","doi":"10.2139/SSRN.1024012","DOIUrl":"https://doi.org/10.2139/SSRN.1024012","url":null,"abstract":"The current study adds consideration of a $1.7 billion accelerated stock repurchase (ASR) by Hewlett-Packard (HP) to a recent analysis of 2006-2007 ASRs by Applied Materials, Cypress Semiconductor, Linear Technology, and Xilinx. The HP addition to company case studies leaves fundamental findings on ASRs unchanged including: 1) Liability (ASRs are denied a 10b-18 safe harbor) 2) Disturbing, pre-deal, stock activity (prices rise 10% pre-deal) 3) Idiosyncratic, incomplete, and sometimes misleading disclosures 4) Inferior risk/reward relative to alternatives. Studied ASRs all share these drawbacks. That does not prevent some from being profitable. Profitability depends on post deal stock performance rather than liability exposure, governance quality, or disclosure transparency. Still, regardless of profitability, ASRs are found to provide lower returns compared to simpler and/or less risky alternatives. So, why have ASRs grown in popularity in recent years? Other than sympathetic accounting, no satisfactory explanation is found or hypothesized. HP's ASR reinforces the view that cosmetic accounting rather than economics attracts companies to ASRs. In published interviews, HP managers explain their goal: A deal to smoothly offset anticipated options dilution without incurring a reported profit, loss or fee. HP's ASR achieves that goal. Like other ASRs, HP's requires no income statement recognition. Absent any income accounting, HP's banker and counterparty, BNP Paribas, is free to report that HP \"probably saved over $100 million.\" However, we calculate, to the contrary, that the $1.7 billion transaction costs HP and its ongoing shareholders at least $115 million (6.7%) while exposing HP to unnecessary liability. Whether ASRs facilitate efficient execution of large buybacks with superior governance may be an open question. Arguably, equity accounting for options and buybacks should be revisited. But, as ASRs become a larger proportion of total buybacks, the need for better disclosure seems a modest, reasonable and necessary start.","PeriodicalId":129325,"journal":{"name":"Journal of Accounting & Economics (JAE) Conference Series","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115987219","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.
{"title":"Limited Attention, Information Disclosure, and Financial Reporting","authors":"D. Hirshleifer, S. Teoh","doi":"10.2139/ssrn.334940","DOIUrl":"https://doi.org/10.2139/ssrn.334940","url":null,"abstract":"This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.","PeriodicalId":129325,"journal":{"name":"Journal of Accounting & Economics (JAE) Conference Series","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125571311","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Our analysis suggests that boards focus on deviation from expected performance, rather than performance alone, in making the CEO turnover decision, especially when there is agreement (less dispersion) among analysts about the firm's earnings forecast or there are a large number of analysts following the firm. In addition, our results suggest that boards are more likely to appoint a CEO that will change firm policies and strategies (i.e., an outsider) when forecasted five-year EPS growth is low and there is greater uncertainty (more dispersion) among analysts about the firm's long-term forecasts.
{"title":"The Impact of Firm Performance Expectations on CEO Turnover and Replacement Decisions","authors":"K. Farrell, David A. Whidbee","doi":"10.2139/ssrn.318968","DOIUrl":"https://doi.org/10.2139/ssrn.318968","url":null,"abstract":"Our analysis suggests that boards focus on deviation from expected performance, rather than performance alone, in making the CEO turnover decision, especially when there is agreement (less dispersion) among analysts about the firm's earnings forecast or there are a large number of analysts following the firm. In addition, our results suggest that boards are more likely to appoint a CEO that will change firm policies and strategies (i.e., an outsider) when forecasted five-year EPS growth is low and there is greater uncertainty (more dispersion) among analysts about the firm's long-term forecasts.","PeriodicalId":129325,"journal":{"name":"Journal of Accounting & Economics (JAE) Conference Series","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126984878","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This basic assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a naive view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence against market efficiency for future capital market research in accounting.
{"title":"Market Efficiency and Accounting Research: A Discussion of 'Capital Market Research in Accounting' by S.P. Kothari","authors":"Charles M. C. Lee","doi":"10.2139/ssrn.258495","DOIUrl":"https://doi.org/10.2139/ssrn.258495","url":null,"abstract":"Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This basic assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a naive view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence against market efficiency for future capital market research in accounting.","PeriodicalId":129325,"journal":{"name":"Journal of Accounting & Economics (JAE) Conference Series","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2001-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130006343","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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