Abstract
This paper aims to derive an undervaluation signal from the insider trading of Indian companies, where the ownership is complex and concentrated, investors’ protection is weak, and the insider rules and regulations are not stringent like a developed country. It also examines the relationship between insider trading and the actual share repurchase by the firm. A sample of 78 companies spanning from 2008–09 to 2014–15 is analysed in this study because of the unavailability of insider data in the Indian context. The paper finds that insider trading of sample firms are more than matching firms before buyback announcement. Insider buying before share repurchase announcement positively influences share repurchase decisions. We observed that insider buying has a positive and significant relationship, whereas insider selling has a negative and significant relationship with announcement return. We also found that insider buying has a positive and significant relationship with actual share repurchase and program completion. The study is constrained by the small sample size, so the results must be viewed by keeping this limitation in mind. The paper is the first study in the Indian context wherein the insider trading literature is extended to share repurchase to find out undervaluation signal associated with it.
Highlights
Undervaluation as a primary motive for share repurchase is well accepted in throughout the world, and vast literature is available in its support (Vermaelen, 1981; Dann, 1981; Comment & Jarrel, 1991; Bartov, 1991; Ikenberry, Lakonishok, &Vermaelen, 1995; Dittmar, 2000; Yarram, 2014)
Insider buying is segregated into different insiders as per the availability of data in the Indian context, and the results show that insider buying by directors and promoters has a positive and significant relationship with actual share repurchase
This paper investigates the private information conveyed by insider trading with regard to share repurchase and undervaluation
Summary
Undervaluation as a primary motive for share repurchase is well accepted in throughout the world, and vast literature is available in its support (Vermaelen, 1981; Dann, 1981; Comment & Jarrel, 1991; Bartov, 1991; Ikenberry, Lakonishok, &Vermaelen, 1995; Dittmar, 2000; Yarram, 2014). It is further reported that tender offer gives more credible and strong signal of undervaluation than open market share repurchase (Comment & Jarrel, 1991). The key argument of the paper is about investors’ way of understanding the credibility of the undervaluation signal conveyed by the open market share repurchase announcement and their reaction to it. Insiders buy shares before repurchase announcement by perceiving that shares are undervalued and do exactly the opposite when they perceive the shares to be overvalued. Insiders gain profit through purchase of undervalued share before share repurchase announcement and prevent loss by selling overvalued share before an announcement
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
