Abstract
This study examines signaling, excess cash flow, substitution, leverage, agency cost, stock and liquidity hypotheses by considering firm-specific parameters to find out their impact on selection between tender offer and open market method while doing buyback. This study is based on the basic premise that the rules and regulations those govern these two methods are completely different and have different objectives. This study takes 430 non-financial buybacks from 1998–1999 to 2017–2018 for analysis and these buybacks segregated in terms of tender offer (176) and open market methods (254). In this study, both univariate and multivariate tests have been employed. T-test and Wilcoxon rank sum test are used for univariate analysis, and logistic regression is used for multivariate analysis. The empirical findings corroborate the evidence that free cash flow hypothesis, leverage hypothesis, agency cost hypothesis and liquidity hypothesis are the prime motivators for choosing of tender offer than open market share repurchase. This study finds that dividend paid and choosing of tender offer are substitutes. The results also support the notion that for correcting short-term undervaluation firms choose tender offer rather than open market methods. This study is the first comprehensive analysis in the Indian context to find out the motivations behind the selection of share repurchase methods.
Highlights
Share buyback is considered as a mainstream corporate activity after 1990; it experienced a phenomenal growth after 1990 and surpassed the total amount spent on dividend paid in USA (Grullon & Michaely, 2002; Lee et al, 2007)
This study examines the determinants of the choice between tender offer and open market method of Indian companies from 1998–1999 to 2016–2017 by using both univariate and binary logistic regression
This study examines the impact of all individual hypotheses (Signaling, leverage, substitu tion, agency, free cash flow and liquidity) on the selection of tender method for buyback
Summary
Share buyback is considered as a mainstream corporate activity after 1990; it experienced a phenomenal growth after 1990 and surpassed the total amount spent on dividend paid in USA (Grullon & Michaely, 2002; Lee et al, 2007). Some of the studies report that the ratio of open market method to tender offer is 10:1 C. Peyer & Vermaelen, 2005). It shows that the open market method is more popular among corporates for share repurchase than tender method. Studies that compare these two methods of share repurchase in terms of signaling, free cash flow and agency cost hypotheses find that tender offer is much more efficient in signaling, reducing free cash flow and reducing agency cost. Investors react more positively to the announcement of tender offer than open market method Investors react more positively to the announcement of tender offer than open market method (Comment & Jarrell, 1991; U. Peyer & Vermaelen, 2008; Vermaelen, 1981)
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