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Bonus-Driven Repurchases

Published online by Cambridge University Press:  30 June 2015

Yingmei Cheng ,
Jarrad Harford  and
Tianming (Tim) Zhang
Yingmei Cheng
Affiliation:
ycheng@business.fsu.edu, College of Business, Florida State University, Tallahassee, FL 32306
Jarrad Harford*
Affiliation:
jarrad@uw.edu, Foster School of Business, University of Washington, Seattle, WA 98195.
Tianming (Tim) Zhang
Affiliation:
tzhang@business.fsu.edu, College of Business, Florida State University, Tallahassee, FL 32306
*
*Corresponding author: jarrad@uw.edu
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Abstract

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Using a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO’s bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company’s EPS is right below the threshold for a bonus award. Share repurchasing increases the probability the CEO receives a bonus and the magnitude of that bonus, but only when bonus pay is EPS based. Bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 447 - 475
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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