Abstract
The efficient market hypothesis states that in the efficient markets, participants cannot make extra-normal returns by exploiting any publicly available information. However, traders are constantly looking to exploit publicly available information to generate abnormal returns for themselves and their clients. One such event is share buyback announcement, which traders can utilize to create profitable trading strategies. The authors undertake the present study to examine if share buyback announcements provide profitable trading strategies to traders. Event study methodology has been adopted to analyze buyback announcements by Indian companies from January 2012 to December 2018. Forty-one (41) day window period comprising of 20 days pre-event, an announcement day, and 20 days post-event period is created to analyze the risk-adjusted average abnormal returns. The empirical findings suggest that there are negligible trading opportunities available for investors post announcements. However, significant risk-adjusted returns are found in the pre-event window, indicating that if investors can predict buyback announcements, they may earn extra-normal returns. The study confirms that Indian stock markets are in the semi-strong form of efficiency. The study also provides a profitable trading strategy for investors in the pre-event window. Finally, it also draws the regulators’ attention to see if insider trading could be the reason for abnormal returns in the pre-event window. The authors conclude the results by confirming that Indian markets are semi-strong in market efficiency and by indicating regulatory interventions to control insider trading. AcknowledgementThe infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.
Highlights
The practice of share repurchases can be traced back to the late 1960s when U.S companies started the practice; it gained momentum only in the 1980s and has become a constant feature of corporate announcements in recent decades (Vermaelen, 2005)
In the absence of any significant post-announcement returns observed in the sample data, the authors conclude that stock markets in India are in the semistrong form of market efficiency, as propounded by Fama (1960), and buyback announcements in India do not offer any significant trading strategy to traders
Using an event study methodology, the present study is conducted to find the impact of share buyback announcement on stock returns for a short-term period in an Indian context
Summary
The practice of share repurchases can be traced back to the late 1960s when U.S companies started the practice; it gained momentum only in the 1980s and has become a constant feature of corporate announcements in recent decades (Vermaelen, 2005). & Chung, 2001; Peyer & Vermaelen, 2007), or due markets show an immediate jump in the pricto lack of investment opportunities (Grullon & es, which provide abnormal returns; the Michaely, 2004) or to indicate robust future per- tenure of these returns is very short These formance (Lie, 2005), or to boost earnings per announcements should be considered as a strategy share by diluting the effect of stocks options (Bens, to gain returns only for a shorter period (Rajlaxmi, Nagar, Skinner, & Wong, 2003) or perceiving the 2013). Extending the study for more years, ed to tender offers have provided more returns to Hyderabad (2009b) examined market reaction to the investors vis-a-vis open market repurchases multiple buybacks.
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