EPS-motivated share repurchases and wealth transfer

We study the association between earnings-per-share (EPS)-motivated share repurchases and wealth transfer between the repurchasing firm's ongoing shareholders and selling/transacting shareholders. Compared to other repurchases, EPS-accretive repurchases are associated with greater wealth transfer from ongoing to selling shareholders, thereby reducing shareholder value for ongoing shareholders. We also find that EPS-accretive repurchases used to meet/beat analyst forecasts are associated with incrementally more wealth reduction for ongoing shareholders, compared to other EPS-accretive repurchases. These findings suggest that, compared to other repurchases, repurchases driven by EPS concerns are more likely to benefit selling shareholders at the expense of ongoing shareholders (all else equal). Using quarterly earnings announcements, we find that investors price this one-time repurchase-induced wealth reduction for ongoing shareholders. Despite this, however, investors appear to take a positive overall view of EPS-driven repurchases, suggesting that the benefits of such repurchases for ongoing shareholders outweigh the one-time wealth reduction from such repurchases. Consistent with this, we find that EPS-motivated repurchases are associated with better future operating performance.