Share Repurchases, Signalling Effect and Implications for Corporate Governance: Evidence from India

Abstract

It is worth mentioning that a great deal of financial liberalisation, privatisation and internationalisation policies in emerging economies have significantly increased the corporate restructuring activities like mergers, acquisitions, share repurchases and stock splits, among others. Indeed, the activity that is investigated in this article is ‘share repurchases’ and its effect on stock returns and price-to-earnings (P/E) ratio. More deeply, this article will answer the research question—does a share repurchase offer abnormal returns around the announcement? Thus, it is performed in one of the Asian emerging markets—India. To do so, we use event-study method to examine abnormal returns and P/E signalling around the announcement of 64 share repurchases, announced during 2008–2009. It is found that stock performance is not adequate and notices lower as well as negative earnings during post-buyback period. Briefly, we conclude that share repurchases assure short-term returns and observe lower P/E compared to pre-buyback period. In addition, we show some interesting results that derived from industrial and services sectors. The outcome of this article would help financial analysts, financial advisors, corporate enterprises and regulatory bodies in designing policies on earnings distribution, managerial incentives, takeovers and so forth of regulatory aspects.