Bonus-driven Repurchases*

We examine explicit financial incentives that CEOs have to manipulate their bonus payments through repurchases. Utilizing a large hand-collected database of CEO bonus structures, we test whether CEOs use repurchases to manage earnings per share for the purpose of their own financial benefit. 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 and the magnitude of the buyback tends to be larger. Share repurchasing has a positive impact on the probability of receiving a bonus and the magnitude of that bonus, but only when the bonus pay is determined by EPS. Furthermore, when the company’s EPS is close to the EPS threshold for a bonus award, the company is more likely to conduct a share buyback. Unlike many other repurchases, bonus-driven repurchases are not motivated by perceived undervaluation; bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns while, consistent with prior research, we find that other repurchasing firms do. Bonus-design can create a purely personal incentive to initiate a repurchase. This is costly to shareholders as managers reduce R&D expenditures to fund the repurchases