Share Price Behaviour Around Buy Back and Dividend Announcements in India

Abstract

Over the past few years, many firms have announced significant number of stock repurchases. The overwhelming reason given for stock repurchase announcements has been to reverse a trend of declining stock prices. Share buy backs have become an important area in financial research considering its strong implications for corporate policy. Indian companies have been permitted to buy back shares after the provisions of the Companies Act 1956 were suitably amended in 1999. Several studies have provided conclusive proof of signaling effect of stock repurchase and dividends announcements. This paper investigates and tests the following: 1) Signaling effect of a share buy - back and dividend announcements 2) The market reaction and share price behaviour to announcements of stock repurchases and dividends 3) Abnormal Returns across various repurchase levels. The analysis uses data of 22 firms in the BSE 500 index, which has announced stock repurchase option and dividends during the period 2002-2004. An examination of share price behaviour around stock repurchases and dividends prove the signaling effect of these announcements. Stock repurchase programs recorded a high cumulative abnormal return of 3.2 percent within two days of the event whereas dividend announcement recorded a high cumulative abnormal return of 2.1 percent within one day of the event. There is no significant difference in abnormal returns as result of various repurchase levels. These results imply the strong signaling power of stock repurchases announcements and that the market reacts more favourably to repurchases compared to dividend announcements.