Stock repurchases as an earnings management mechanism: The impact of financing constraints

- Share repurchases have become more prevalent as a mechanism to manage earnings.
- Financing constraints lessen the use of repurchase-based earnings management.
- Financing constraints are negatively related to other real earnings management.
- Financing constraints are positively related to accrual-based management.

Our paper provides evidence regarding the use of share repurchases as an earnings management mechanism in the presence of debt-financing constraints as well as the impact of these constraints on the use of accruals and other real earnings management techniques. We document that share repurchases are prevalent as a mechanism to increase earnings per share. Next, we show that the presence of debt-financing constraints discourages the use of repurchase-based earnings management. We also find that for firms more likely to be engaged in earnings management, high financing constraints appear to increase the use of accruals based earnings management and decrease the use of other real earnings management techniques.