Passive Investment and Share Repurchases

Research output: Contribution to journalArticlepeer-review

Abstract

SYNOPSIS: We investigate the association between passive investment and share repurchases, both of which are at historically high levels and the subject of increased scrutiny. We first document that firms with more passive ownership exhibit higher levels of repurchase activity. Next, and more importantly, we find that firms with passive ownership conduct more “suspect” repurchases that result in reported earnings that meet or beat analysts’ earnings forecasts, and this effect is more pronounced for firms with performance-based equity compensation incentive plans. We also find that repurchase activity more negatively affects firms’ future employment, capital expenditures, and performance when the firm has more passive owners. We conclude that passive investment is associated with an increase in the quantity and a reduction in the quality of firms’ repurchase activities. Our study provides evidence that passive institutional investment may allow opportunistic management behavior rather than serving the monitoring role traditionally associated with institutional ownership.

Original languageEnglish
Pages (from-to)33-57
Number of pages25
JournalAccounting Horizons
Volume39
Issue number2
DOIs
StatePublished - Jun 2025

Bibliographical note

Publisher Copyright:
© 2025, American Accounting Association. All rights reserved.

Keywords

  • earnings management
  • passive investment
  • payout policy
  • stock repurchases

ASJC Scopus subject areas

  • Accounting

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