Rethinking Accounting for Stock Repurchases

SYNOPSIS

Using hand-collected data from statements of shareholders’ equity, we document significant diversity in practice across firms in how they charge stock repurchase costs to shareholders’ equity accounts. Some firms charge repurchase costs entirely to the treasury stock, paid-in capital, or retained earnings accounts, whereas others split repurchase costs in various combinations across multiple accounts. This raises two concerns. First, reported shareholders’ equity accounts may lack comparability across firms because standards permit economically similar repurchases to be reported differently. Second, reported retained earnings and paid-in capital may not faithfully represent a firm’s undistributed income and amounts received from shareholders for issuing shares of stock, respectively, but rather arbitrary repurchase accounting choices. We propose that standard setters rethink financial reporting standards for stock repurchases by either simplifying shareholders’ equity presentation or reducing discretion in accounting for repurchases.

Data Availability: All data are available from the public sources cited in the text.

JEL Classification: M41.