By Standard & Poor's count, companies in the S&P 500 spent an estimated $437 billion buying back their shares last year, up from $349 billion in 2005 and $197 billion in 2004.

Share repurchases are one way companies return a portion of the increasing amounts of cash on their balance sheets to shareholders. Another way is dividends and S&P 500 companies spent an estimated $224 billion on the quarterly payouts last year, according to the investment research firm.

Buybacks signal that management -- which is in a position to know -- believes Wall Street is discounting the value of its company's shares. Repurchasing them at what management considers to be bargain prices is a vote of confidence in the company's future.

Investors respond accordingly, typically driving the stock price higher after repurchases are announced. After all, spreading the same amount of earnings over fewer shares outstanding increases per-share profits, a common method for valuing stocks.

Three professors at Penn State's Smeal College of Business are putting a new perspective on the conventional wisdom about repurchases. Guojin Gong, Henock Louis and Amy Sun studied 1,720 companies that repurchased shares between 1984 and 2002. Their conclusion: The superior returns stocks experience after repurchase plans are announced have a lot to do with the way companies "manage" their earnings in advance of the announcement.

Generally accepted accounting principles give managers considerable discretion. Because there can be a significant range of acceptable answers regarding depreciation, bad debt allowances and other accounting issues, companies can "manage" reported earnings without running afoul of the audit police. The Penn State professors' research shows that companies use this discretion to "significantly deflate" earnings in advance of announcing they will repurchase shares.

Once the announcement is made, the increased stock price and improved operating performance "is due, at least partly, to pre-purchase earnings management," they write in a paper to be published in an upcoming edition of the Journal of Finance.

"Once we control for the effect of pre-purchase earnings management, there is no evidence of performance improvement," the professors conclude.

They also found that the more shares a company plans to repurchase and the more shares a company's chief executive officer owns, the more they manage to reduce earnings prior to the buyback.

Mr. Louis emphasizes that the earnings management he and his colleagues examined is not accounting fraud.

There's a range of acceptable answers that can be justified to auditors; the study found managers prefer options that lower earnings in advance of a buyback.

"If you're just out of bounds, your auditor will call you on it," Mr. Louis says.

Their research indicates there's a significant amount of earnings deflation going on in advance of buybacks, activity that apparently escapes the attention of analysts and professional investors.

"It's intriguing that the market is fooled by these actions," Mr. Louis says.

Some may believe lowering earnings prior to a buyback is management's way of looking out for shareholders by reducing the cost of repurchasing shares. But Mr. Louis isn't so sure.

"I tend to think they think of their own interests first," he says. "If he [the CEO] has no interest, he's not going to do it."

One of their most intriguing findings is that companies that announce repurchase plans but didn't actually buy back their shares did not manage earnings leading up to the repurchase announcement. Yet their stocks still advanced.

"We still cannot understand what's going on," Mr. Louis says.

Their research occurred prior to Congress tightening accounting reporting rules with sweeping legislation referred to as Sarbanes-Oxley. There's no reason to believe the reform would change their conclusions, Mr. Louis says.

The research doesn't diminish the attraction of share repurchases as a signal to consider buying the stock of a company doing the repurchasing, says Steve LeCompte of CXO Advisory Group in Manassas, Va.

"Assuming that management times repurchases as well-informed traders, share repurchases on average may offer greater returns to long-term shareholders than cash dividends," he says.

As an investor, Mr. Louis prefers buybacks over dividends, which trigger an immediate tax liability. Buybacks provide investors more flexibility in regard to tax planning. While their shares may rise after a repurchase is announced, they don't have to pay taxes until they actually realize a gain by selling their shares.

Seems like CEO's aren't the only ones who like the flexibility of managing their earnings.