Financial Flexibility Through Share Repurchases: Evidence from India

Abstract

Corporate restructuring has become a necessity for the survival and growth of the companies. Sound and functional strategies are needed for the companies in order to maintain competitive edge and to avoid financial distress. Financial flexibility has become a central concern for managers for effective capital management. Such flexibility through share repurchases facilitates firms to respond to fluctuations in stock prices and investment opportunities. This study examines the impact of financial flexibility through share repurchase announcements of BSE 500 index firms listed on the Bombay Stock Exchange for the period of ten years 2003–2013. Using event study methodology, the chapter intends to provide insights into how share repurchase announcements impact stock price through abnormal returns in India. The results document that the share repurchase announcements have information content leading to positive average abnormal returns through change in prices. The findings provide support to the undervaluation and signaling hypotheses. The empirical evidence lends credence to other motives like reducing agency costs, better capital market allocations through excess cash flows, wealth transfer, smoothening price discovery and capital structure adjustment behind share repurchase announcements. The results provide insight as to whether share repurchases can be used as a payout mechanism by the sample companies. They also provide explanation for the behaviour of stock prices subsequent to share repurchase announcements. The findings would also be useful to the academia as well as the industry in understanding the payout practice and the extent to which decisions related to share repurchases.