Understanding equity repurchase motives for different firm set-up: Indian evidence

Vandana Bhama

doi:10.21511/imfi.18(1).2021.08

Abstract

Corporates express their intention to reward shareholders during repurchase announcements by maximizing their wealth. However, most empirical research finds that stocks’ performance is poor when repurchase announcements are made, and there are no significant abnormal returns. In the Indian context, the present study examines firms’ real intention behind repurchase decisions. The sample comprises 132 firms listed on the Bombay Stock Exchange (BSE) from 2012 to 2018. A Tobit regression model has been used on different firm set-up. The empirical results reveal that low stock valuation is the prominent reason for buybacks among corporates. Firms prefer repurchases to provide abnormal returns to the investors; however, the Indian market does not react much positively to the repurchases, and this might be the reason for less encouraging buybacks in the Indian market. Further, the tender offer is the most preferred mode to open market repurchases. In the case of service firms, undervaluation, low earnings, and low debt ratios are the contributing factors impacting repurchases. Firms with low dividend intend to have more buybacks to reduce their tax burden. Acknowledgment The infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.

Highlights

Firms intend to provide positive returns through repurchases, most research in the Indian context tested the buyback announcements’ impact on stock returns using market timing theory
In the Indian context, the present study examines firms’ real intention behind repurchase decisions
The debt rathrough tender offer (10.5% of market value of tio mean values are statistically significant across equity) vis-à-vis open market repurchases

Summary

INTRODUCTION

Firms intend to provide positive returns through repurchases, most research in the Indian context tested the buyback announcements’ impact on stock returns using market timing theory. They noted that excess cash funds, low investment options, Literature has covered various aspects of buyback stock undervaluation, higher dividend payout raby testing different theories. The major reason for tio, liquidity, and diluted ownership are the major repurchase is the mispricing of stock value (Chan contributing factors of repurchases among Indian et al, 2004), though stocks perform poorly after firms Another value-enhancing drive of undervalued size, age, dividend payout, and leverage rafirms is to adjust their capital through share repurtio impact the firm’s intentions for buyback chase to have an optimal capital structure Ket value of equity[2]

BUYBACK HYPOTHESES

Data and statistics

EMPIRICAL RESULTS

CONCLUSION