Price Performance following Share Buyback Announcements in India

Abstract

Share buy backs, also known as share repurchases in the West, were permitted in India in 1998 through a change in the provisions of the Companies Act, 1956. This method is used for several purposes; prominent amongst them is correcting market undervaluation. Several studies in the US have tested the market correction ability of buy backs by computing abnormal returns. The studies have found an average announcement return of 3 percent to 3.5 percent. Such positive reactions are also observed in the UK and other European countries. The present study is an attempt to test the signaling ability of buy backs in the Indian context. Taking a sample of 68 buy back announcements for which complete information was available, the study computes event returns both method-wise and year-wise over several window periods. The analysis shows that average abnormal return (AAR) on the date of announcement is 2.83 percent while cumulative abnormal return (CAR) is about 6 percent on the announcement date with an overall CAR 5.16 percent for 41-day event window. The market reaction in India is relatively higher than what the studies in the US and the UK have found, indicating that Indian capital markets are more undervalued and there is a greater degree of information asymmetry. The study also analyses the year-wise movement in AAR and CAR and observes that CAR is lower in years of both lower and higher number buyback announcements. This independence of CAR to number of buyback announcements indicates that CAR is explained by some other factors. An analysis of methods of buyback shows that open market repurchases have greater signaling ability than the fixed price tender offers in the Indian context, contradicting what the US studies have found.