Accounting for Share Repurchases: Evidence from Exogenous Variation in U.S. GAAP and State Laws

Abstract

The accounting treatment for share repurchases under U.S. GAAP varies based on a company’s state of incorporation. We exploit this unique characteristic to study the valuation implications of accounting choice and under what circumstances the valuation effects are amplified or attenuated. We find that the existence of accounting choice, in states that allow it, is associated with a valuation premium. This is consistent with the notion that discretion in accounting, which can be used to communicate information to stakeholders, is valued by equity investors. We also document instances in which these valuation effects vary, such as when one accounting method can better convey a firm’s underlying intent behind its share repurchase activity or when one accounting method has a more negative impact on certain financial statement accounts. Due to the exogenous variation in the accounting treatment of share repurchases, our study is the first to isolate valuation implications of the existence of accounting choice, a concept that has been elusive to date.