announcement effect of share buyback_part-i

8/8/2019 Announcement Effect of Share Buyback_Part-I

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Announcement Effect of Open Market Share Buybacks in India: Part-I*

Dr S Narayan Rao

Associate Professor of Finance

S J M School of Management

IIT Bombay

Powai,, MUMBAI-400076, Maharashtra (India)

e-mail: [email protected]; Ph:+91-22-25768744

On sabbatical leave at

T A Pai Management Institute

MANIPAL-576104, Karnataka (India)

e-mail: [email protected] ; Ph: +91-820-2701039

About the authorProf S N Rao is Associate Professor of Finance at Shailesh J. Mehta School of Management, IIT Bombay. He has

been a core faculty member at UTI Institute of Capital Markets (now Indian Institute of Capital Markets), Navi

Mumbai, The Institute of Chartered Financial Analyst of India (ICFAI), Hyderabad; PSG Institute of Management,

Coimbatore; Institute of Technology and Management, Mumbai and has also been the coordinator of ICFAI Business

School, Hyderabad. His publications appeared in Journal of Financial Decisions, Eurasian Review of Economics and

Finance, Vikalpa, Decision, Finance India, ICFAI Journal of Applied Finance and other leading professional journals.

He conducted and taught in many MDPs in the area of Finance. He presented research papers in professional

international conferences held in Canada, USA, Germany, Switzerland, Malaysia, Australia and Japan. His areas of

interest include Mergers and Acquisition, Financial Engineering, Security Analysis and Portfolio Management,

Corporate Finance, and Capital Markets. He is member of International WHOS WHO Historical Society; Marquis

WHOs WHO; and Midwest Finance Association.

*Thispaperisacceptedforpresentationat InternationalConferenceonFinancialInnovations&

ChangeforSurvival&GrowthtobeheldatMDI,Gurgaon on78Jan2011andAnnualConferenceof

EasternFinanceAssociation (USA)tobeheld atSavannah,Georgiaon1316April2011.


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Announcement Effect of Open Market Share Buybacks in India: Part-I

ABSTRACTInformation related to share buybacks is released in two stages in India. In the first

stage information about the approval of buyback is released to stock exchanges (in

some cases through print media).In the second stage detailed information about the

buybacks is released through print media. In most of the cases, there is sizable gap

between the two stages. This part of the study examines the effects of

announcement of approval of open market buyback in India. The sample consists of

64 open market share buybacks approved during 2003-2010 (till June). The

evidence suggests that significant sustainable increases in firm values occur around

the announcement of buyback approval. The results support information signaling

hypothesisof share buyback.

JEL classification: G35

Keywords: Announcement effect; share buyback, information signaling

1. INTRODUCTIONFirms in the USA began share buybacks in early 60s. Between 2003 and 2007, the

amount of cash spent by S&P 500 companies on buyback nearly quadrupled, from

$135 billion to $590 billion. According to the review article of Hsieh and Wang

(2009) share repurchases have surpassed cash dividends and become the dominant

form of corporate payouts since the last decade. The increased interest shown by the

repurchase program in the USA spread to Canada in the 1980s. Share repurchase

in Europe also started in the 1980s. In Asian countries buybacks were permitted in

Japan in 1995 followed by Malaysia in 1997, Singapore, Hong Kong and India in

1998, and Taiwan in 2000.

Share buyback was allowed in India through an amendment to Companies Act,

1956. There were various factors which prompted the Indian government to

consider introducing the share buybacks. One of the factors was prolonged


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depression in the stock market during 1996.Business houses and trade associations

had made a strong case for share buyback as possible solution for reviving the stock

market, because share buyback price is often higher than the prevailing market

price.

More than 300 buybacks are implemented during 1999-2009 and around $1.5 billion

is spent on the buybacks.

Objective of this study is to understand the reaction of investors to open market

buybacks through stock exchanges, by analyzing abnormal returns around the

announcement of buybacks. In India companies release the information related to

buyback in two to three stages. In the first stage information about the approval of

buyback by board/shareholders is released to stock exchanges, in the second stage

public notice (PN) about the approval is released, through print media, giving

important details of buyback (except time table of buyback) and in the third stage

public announcement (PA) containing all the details of the buyback, as prescribed in

regulations, is released through print media. In some cases, after the release of

information about the approval directly public announcement is released. As per the

regulations, companies have a period of 12 months from the date of approval of

buyback to complete the buyback process. Thus, in most of the buybacks there is

gap (in some cases long gap) between the announcement of approval of buyback and

public announcement of buyback. This study analyses the announcement effect of

approval of open market share buybacks.

The next section covers regulatory frame work for buyback in India. Section-3

summarizes the reasons for buyback; literature review is given in section-4.

Hypothesis is stated under section-5; methodology is explained in section-6. Section-

7 provides details on data and sample. Results are discussed in section-8 and

section-9 presents conclusions. Scope for future work is given in section-10.


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2. BUYBACK REGULATIONS IN INDIASecurities and Exchange Board of India (SEBI) announced regulatory framework

for share buybacks in November 1998. As per the regulations a company may buy-

back its shares or other specified securities by any one of the following methods:

(a) Tender offer

(b) From open market through

(i) Stock exchanges

(ii)Book-building process

(c) From odd-lot holders.

However, open market through stock exchanges mode has emerged as the most

preferred alternative. This mode offers the companies flexibility in timing and

pricing of buybacks. All of the buybacks in recent times have been through open

market.

Other regulations are:

The buyback should be authorized by the Articles of Association of the

company.

The buyback should be approved with special resolution

The sources of funds should be from the free reserves, securities premium

account, or the proceeds of any stocks or other specified securities, other than

the types of securities bought back, but should not be from borrowing for thespecific purpose.

Only fully paid up shares are eligible for buyback.

Promoters are not allowed to participate in open market buyback


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Amount used for the buyback should not exceed 10% of the total paid-up

capital and free reserves of the company

Buyback should not be more than 25% of the paid up capital. In other words

buyback should not be more than 25% of outstanding shares.

Post-buyback debt-equity ratio should not exceed 2:1

The buyback has to be completed within 12 months from the date of passing

of the special resolution.

The shares have to be extinguished and physically destroyed within 7 days

after the closure of buyback.

Buyback cannot be affected where there is default by the company in

repayment of public deposit or interest, redemption of debentures or

preference stocks, payment of dividend, or payment of loan or interest to

financial institutions or banks.

3. REASONS FOR SHARE BUYBACKThere are number of possible reasons for share buybacks. These reasons can be

classified in the following way:

a) Information signaling: Management of company should understand the value

of their stock better than anyone outside the company. A buyback will

represent the managements signal that the stock is undervalued.

b) Leverage:A buyback will often increase financial leverage, thus , companies

with additional debt capacity may buyback shares in order to move toward a

more desirable capital structure

c) Takeover defense: A buyback may be used as a defensive tactic in a hostiletakeover by increasing the leverage of the company, reducing the liquidity

and number of shares available to the hostile raider. A buyback also increase

relative shareholding of promoters.


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d) Wealth transfer: A buyback that is undertaken when shares are undervalued

transfers wealth to non-participating from participating shareholders. A

buyback may also result in a wealth transfer from bondholders or creditors to

the non-participating shareholders because the increased debt used to

finance the buyback reduces the assets of the company and therefore the

value of the claims of creditors. Another aspect of wealth transfer through

buyback is from government to participating and non-participating

shareholders as buyback reduces tax impact compared to the distribution of

cash in the form of dividends.

e) Free cash flow: It is argued that management having access to free cash flow

tend to invest in businesses which destroy the wealth of shareholders. In

such situations, buyback is an efficient means of returning cash to

shareholders who can make better use of the cash than the company.

f) Earnings per share: Price-earnings ratio is a popular tool used for stock

market valuation of firms. A buyback improves earnings per share and in

turn the valuation of the firm. It also stabilizes earning per share in the

event of declining net profit.

g) Temporary Cash Flows: When a firm receives temporary cash flows and it

does not have profitable investment opportunities it has two alternatives to

distribute the cash to shareholders. If it chooses to distribute the temporary

cash flow through higher dividend, the cash distribution gets

institutionalized. The shareholders expectations about future dividends will

rise. Since the similar cash flows are not expected in future, firms prefer to

distribute the temporary cash flow through buyback.

These are the major reasons for share buybacks. However, it is not an exhaustivelist. Other possible reasons include savings in administrative overheads by

eliminating fractional shares and odd-lot holdings, and improving the value of stock

options held by management.


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A number of studies in the USA have endeavored to evaluate these possible reasons

for share buyback.

Objective of this study is to analyze the announcement effect of open market share

buybacks through stock exchanges in India. We hypothesize that investors perceive

buybacks as information signaling device. In other words, companies undertake

buybacks for the purpose of information signaling.

4. LITERATURE REVIEWSince focus of this study is information signaling aspects of buyback, literature

review is confined to the studies related to buyback as information signaling.

Among all the studies conducted in the USA to provide explanation for share

buyback, information signaling has the strongest empirical support. When a

company buyback its shares, management gives an information signal to

shareholders. However, the signal may be ambiguous. On one hand, it may be that

the company has no profitable use for its funds and therefore undertakes a buyback

as a means of returning these funds to shareholder. On the other hand,management may believe that the company is undervalued and a buyback, which is

undertaken at a significant premium above the current market price, is a means by

which management passes this information on to shareholders. Thus, to validate

buyback as information signaling, one should analyze the post buyback operating

performance.

Signaling aspect of buyback can be tested empirically. In particular, the share

prices of buyback companies can be examined in order to determine whether or not

any premium that is offered to shareholders by the company to buyback shares is

permanent. In other words, that the share price permanently increases following

the buyback announcement.


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One of the most influential studies of buybacks in the USA was undertaken by

Vermaelen(1981). He examined 131 tender-offer buybacks and 243 open-market

buybacks. The average premium offered to shareholders as part of the tender offer

buyback was 23 per cent. The study attributes the positive share market reaction to

an information signaling effect whereby management undertakes a buyback to

convince investors that the shares of the company are undervalued. The study

further found that the magnitude of the premium offered to shareholders was

positively related to the percentage of outstanding shares repurchased and the

fraction of companys shares owned by managers. This evidence is consistent with

the signaling explanation. Vermaelen also found that the confidence of managers in

the future prospects of their companies was accompanied by subsequent abnormal

earnings performance. Vermaelen argued that open-market buybacks provide less

powerful signals than tender-offer buybacks. He found that tender-offer buybacks

resulted, on average, in permanent gains to shareholders of 13 per cent. In contrast,

open-market buybacks resulted in permanent gains to shareholders of only 2

percent.

Comment and Jarrell examined 97 fixed-price tender-offer buybacks and 72 Dutch-

auction (open-market) buybacks over the period 1984-1989. They found that, onaverage, Dutch-auctions resulted in an average positive return to shareholders of

7.7 percent, compared with 11.9 per cent for fixed-price buybacks. Authors also

believe that the Dutch-auctions are less informatve than fixed-price buybacks as

signals of undervaluation.

Other reasons why management may signal its expectations with buy-backs (andalso with dividends) are given by Asquith and Mullins (1986). They argue that

announcements of both dividends and share buybacks are effective signals because

they are backed by hard, cold cash.


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The information signaling explanation for buybacks also receives support from the

study of Wansley, Lane and Sarkar (1989). They conducted survey of 140 chief

financial officers of USA companies which undertook share buybacks. The

questionnaire asked the respondents to comment upon a number of possible

explanations for why their companies had undertaken share buybacks. The only

explanation for which there was significant agreement among respondents was that

the buyback was undertaken to convey managements opinion of the companys

present and future value.

A number of other studies have found support for the signaling explanation. In his

study, Dann(1981) found that share buybacks (tender offers) led shareholders

experiencing positive share returns of approximately 15 percent and that these

positive returns were mostly permanent in that share prices did not return to their

pre-buyback levels. He concludes with the observation the results are consistent

with the hypothesis that repurchase tender-offer announcements constitute a

revelation by management of favorable new information about the value of the

companys future prospects

Hertzel and Jain found that upon a buyback announcement, financial analysts

revise their estimates of earnings forecasts for the company, further evidence

supporting signaling explanation.

Another issue related to signaling aspect of buyback is differential strength of

signals released by buyback of small companies compared to buyback of large

companies. In one of his studies, Vermaelen (1984), observed that small companies

signal more information with buybacks than do large companies when they

undertake buybacks. A subsequent study by Lakonishok and Vermaelen (1990) hasalso documented that the smaller the company undertaking the buyback, the larger

the returns received by shareholders-a result consistent with the theory that small

companies signal more information than large companies when they undertake


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buybacks. Another study by Pugh and Jahera (1990) also arrives at similar

conclusion.

Studies on Canadian buybacks also report significant positive abnormal returns

around the announcement of buybacks(Schmidt, 2006). Lasfer (2002) and Rau and

Vermaelen(2002) report positive abnormal returns for buyback announcements in

the UK. Chen et al. (2004) analyze announcement effect of buybacks in Taiwan and

find significant positive announcement returns. Hatakeda and Isagawa (2004)

analyzed announcement effect for Japanese buybacks and found significant

abnormal returns surrounding the announcements. Balachandran and Faff (2004)

and Lamba and Ramsay (2005) analyzed Australian buybacks. Both the studies

document positive abnormal returns on the announcement day.

Few empirical studies were conducted in India. Studies of Mohanty (2002); Kaur

and Singh (2003); Gupta (2006); and Hyderabad (2009) reported positive abnormal

returns around the announcement of buyback. Mishra (2005) used exhaustive list of

financial parameters and performance measures to perform trend analysis of

buyback firms.

The studies carried out so far in India suffer from one or the other limitations.Sample size of some studies is as small as 12, methodology used for estimating

expected returns was either capital asset pricing model (CAPM) or market model,

closing price is used for computing expected returns, only public announcement of

buyback was considered as an event, sample was consisting of tender offer buybacks

and open market buybacks.

This study improves upon the above limitations. Details of the improvement are

explained under data and sample and methodology sections.


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5. HYPOTHESISWhen a company purchases its stock, management gives an information signal to

investors. The direction of this signal is ambiguous. It may be that the company

perceives no profitable use for internally generated funds because of lack of growth

opportunities. In such cases the information signal is negative. On the other hand,

especially when a company offers to buy its shares at a substantial premium above

the market price, management may believe that their company is undervalued. The

buyback then represents an attempt to pass on the value of this inside information

to the current shareholders. In such cases the information signal is positive.

If the buybacks are perceived as positive signals, stock should experience positive

abnormal returns around the announcement of buybacks. If buybacks are perceived

as negative signals, stock should experience negative abnormal returns around the

announcement of buybacks.

This leads to my hypothesis:

H0: Average abnormal returns around the announcement of approval of buybacks

are not significantly different from zero.

6. METHODOLOGY6.1 Computation of abnormal returns

The basic methodology used in this study involves computing the daily abnormal

returns for the buyback firms, around the event date. The event date is the date on

which buyback is approved. The approval dates are obtained from the contents of

public announcement of the buyback. Event day is indicated as 0 and event period

is identified as 21 days, 10 days before the event to 10 days after the event.

Raw returns for the sample buyback firms during event period are computed as

following:


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(1)

where raw return on stock ion day t, is price of stock i on day tand

P is price of stock i on day (t-1).

A time series of daily stock raw returns are computed for 21 trading days centered

around the announcement date. Unlike of other studies, daily raw returns are

computed using daily closing prices (CP) as well as daily weighted average prices

(WAP). Returns based on WAP are more representative than the same based on CP.

All stock price data is collected from the BSE website.

For computing daily abnormal returns we need daily expected returns. Different

methods are available for computing expected returns. In previous studies in India

either capital asset pricing model (CAPM) or market model are used. In these

models expected returns are computed based on premium for systematic risk only.

For these models to be appropriate, there should significant correlation between

returns on the individual stock and returns on market index (proxy for market

portfolio). In other words, market returns should be able to explain significant

proportion of risk of stock returns. According to the information available on the

website of the BSE, out of 30 BSE Sensex stocks (index of 30 most liquid stocks

listed on the BSE) only 9 have co-efficient of determination (R2) of more than 0.50.

I computed coefficient of determination (R2 ) for the sample companies using daily

returns on the stock and returns on narrow and broad based market indices (S&P

CNX 50 index and S&P CNX 500 index) during one year period ending one month

prior to the public announcement of buyback. The results are presented in

Appendix-1.For only 3 (4 in the case of broad based index) out of 64 sample

companies coefficient of determination is more than 0.50. Thus, for Indian stocks in

general and for the sample stocks in particular, returns are not significantly

explained by market returns. Component of systematic risk is not significantly

high.


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Therefore, in this study two alternative methods are used to compute expected

returns. In case-1 daily returns on market portfolio is assumed as expected returns

on the stock and in case-2 daily average returns on the stock during one year period

ending one month prior to the approval of the buyback is considered as fair estimate

of expected returns on the stock. The S&P CNX 500 index is used as proxy for

market portfolio, and the values of the index are collected from the NSE website.

Index returns are also computed based on daily closing price as well as daily

average price (average of days high and low prices, as daily weighted average is not

available for the index).Thus,

(2)

where, ARit is abnormal return on stock ifor day t, is raw return on stock ifor

day t, and is expected return on stock i for day t. Expected returns on stock

is estimated under two cases as given below:

Case-1: return on the S&P CNX 500 index for day t is considered as the expected

return for the stock, and

Case-2: average daily logarithmic return on the stock during one year period

ending one month prior to the approval of buyback is considered as the expected

return.

The daily average abnormal return (AAR) for the sample is computed as:

(3)

where nis the number of firms in the sample. This cross-sectional mean abnormal

return can be interpreted as the return on an equally-weighted portfolio of thesample companies.

A desirable feature of using a cross-sectional mean abnormal return relative to a

common event is that averaging across many observations mitigates the influence of

other firm specific or market-wide effects that are unrelated to the share buyback


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announcement. However, relying exclusively on a cross-sectional mean or portfolio

return can obscure important price impacts if the predicted impacts are of opposite

sign for a subset of the sample observations. Since this possibility is suggested by

the information disclosure hypothesis, the number of positive and negative

abnormal returns for each day are also reported. Observing the proportion of

positive abnormal returns in conjunction with the mean abnormal return provides

additional evidence regarding the uniformity of price impacts across the sample.

Cumulative average abnormal return (CAAR) is computed as:

(4)

where, -d and + d represent the event period which is -10 to +10 days. Observationof CAARs over the event period will tell us whether the effect of the announcement

is temporary are sustainable.

6.2 Significance test

To test whether daily average abnormal returns are statistically different from 0,

t-statistic is computed as:

(5)

where, is standard deviation of abnormal returns of sample firms on day t.

7. DATA AND SAMPLESources of data for this study are websites of the SEBI (www.sebi.gov.in), the

Bombay Stock Exchange (BSE, www.bseindia.com), the National Stock Exchange

(NSE, www.nseindia.com). Documents related to buybacks (public notice, public

announcement, corrigendum/addendum to public announcement, post-buy back

announcement) are collected from the website of the SEBI. These documents are


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available on the website for the buybacks approved in 2003 onwards. Thus the

study period is 2003-2010 (till June). At least one of the documents is available for

79 open market buybacks through stock exchanges) approved during the period.

According to the information available on the website of the BSE, there were 130

open market buybacks during 2001-2009 (based on the opening date of buybacks).

But the documents related to all these buybacks are not available on the SEBI

website and the BSE information does not have details of approval date.

Unlike other studies on buybacks in India, sample of this study consists of only

open market buybacks through stock exchanges. As reported in literature review,

information signaling strength varies based on the type of buyback. In tender offer

buybacks management announces the specific number of shares it wants to

repurchase, the specific offer period (which has to be between 15-30 days), and the

single price the company will pay for all the shares bought back. In contrast, in

open market buybacks through stock exchanges management announces the

maximum buyback price, maximum amount allocated for buyback program,

minimum number of shares to be bought back (assuming that all the shares are

bought at maximum price and amount allocated for buyback is used fully), offer

period (it is relatively longer, but has to be less than one year from the date ofapproval of buyback). Average price paid for buyback is generally lower than the

maximum price indicated in the announcement. Actual amount used for buyback is

generally less than the maximum amount allocated for buyback. The board has the

right to terminate buyback before the announced closing date. In tender offer

buybacks tendering shareholders surrender shares directly to company, whereas, in

open market buybacks the purchases are executed through brokers at the

prevailing market price. In open market buybacks, company gets flexibility in theimplementation of buyback in terms of timing and pricing. Thus, the impact of open

market buybacks found to be less than that for tender offer buybacks.

All the previous studies in India analyzed effect of public announcement of

buybacks. There is no study which looked into the effect of announcement of


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buyback approvals. As mentioned earlier, the information about the buyback is

released in two to three stages. In the first stage company communicates about the

approval of buyback to exchange, in the second stage some companies release the

information through public notice in print media, and in the final stage every

company is required make public announcement of buyback in print media. This

part of the study analyzes effect of approval of buybacks.

Of 79 open market buybacks identified above, the following criteria are used to

include a buyback in to the final sample:

i) Stock prices should be available on the BSE website for 11 days before the

approval day to 10 days after the approval day.

ii) The date of buyback approval is available in one of the documents

available on SEBI website.

These additional requirements reduce the final sample to 64 open market buybacks

through stock exchanges (made by 59 different companies) for analysis of the effect

of approval of buybacks. List of the sample firms is given in Appendix-2.

Table-1 presents the distribution of the final sample across the calendar years.

Table-1 about hereYears 2008 and 2009 account for more than 60% of the sample buyback approvals.

According to information available on the BSE website total number of buybacks

during 2008 and 2009 were 30 and 36, respectively. The significant increase in

buybacks during 2008 and 2009 can be attributed to the global meltdown. It seems

management of Indian companies was good at timing of buybacks in 2008 by

launching them when the markets bottomed. The S&P CNX 500 lost 57% during

the calendar year 2008. The timing was not correct for buybacks in 2009. The S&P

CNX 500 gained 84% during the calendar year 2009. (in the USA, S&P 500

companies spent record $589 billion on buybacks in 2007; subsequently S&P 500

index was down by 38.5% in 2008. Another case of bad timing of buybacks by the


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USA companies was in 2000 when they loaded up on buybacks, just before the burst

of IT bubble which lasted until 2002).

Summary statistics describing the characteristics of the sample of open market

buybacks through stock exchanges is presented in table-2. The premium offered,

relative to closing price one day prior to board approval day is sizable. Buyback

price is on average 38.67% higher than the closing price on the day preceding

buyback approval. The range of premium is 165.90% to -2.80%.

Table-2 about here

Three day (-1 to + 1 day, 0 being the announcement day) mean abnormal return for the

sample is 2.70% (for returns based on closing price) and 3.49% (for returns based on

weighted average price) for the case where returns on the index is considered as expected

return on the stock. The same in the case where average daily returns on the stock during

one year period ending one month prior to the date of buyback approval are 2.94% and

4.35%, respectively. All of these abnormal returns are significantly different from zero a

0.01 level and above. Varying degrees of positive skewness exist in the distribution of each

of these parameters, but the medians of these distributions are of same general magnitude

as means for most of the parameters. Clearly, buybacks are significant events in the lives othe corporations which undertake them.

Post-buyback public announcement document is available for 22 of 64 sample buybacks

This buyback document provides information like average price paid, actual opening date

actual closing date, amount utilized for buyback, number of shares bought back.etc..

Characteristics of the sub-sample of the above 22 buybacks are as follows:

Six buybacks delayed opening of buyback, on average , by 6,25 days

Five buybacks closed early, on average, by 180 days

Average buyback period is 202 days


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Target buyback was 5.58% of outstanding shares, actual is 3.89%

Average buyback price is 29.41% discount to stated maximum buyback price

Average buyback price is 3.4% above the price on one day prior to the approval of

buyback

Average amount utilized for buyback is 55.72% of the amount allocated.

Table-3 presents reasons for buyback, as stated by the sample buyback companies in the

public announcement document.

Table-3 about here

As per the regulations governing share buybacks in India, buyback companies are

required to give the reasons for the buyback. Number reason given by the sample

buyback companies varies from three to five. As given in table-3, all of the sample

companies given the reason to improve EPS, RONW, and overall shareholder value

for buyback, around half of the sample companies stated to utilize surplus funds

and to provide exit route without adverse impact on price as additional reasons.Four of the sample companies stated to reflect confidence of management in future

prospects and only two of the sample companies stated to signal undervaluation of

stock among the reasons for buyback. If investors accept the first reason of

improving EPS, RONW, and shareholder value through buyback (and also reasons 4

and five); we expect positive effect of buyback on stock prices of buyback companies.

Thus, information signaling theory is suitable for empirical testing on this sample.

Announcement days are spread across the days of the week. Table-4 presents the

distribution of the sample by the day of announcement. Only 22% of the approval

announcements are made at the beginning of the week (Mondays) and 27% on the

weekend (Fridays).


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Table-4 about hereThus, the returns of the sample firms are not affected by temporal anomalies.

8. RESULTS8.1 Announcement Effect Approval of Buyback for Case-1 where the S&P CNX 500

index return is considered as expected return on the sample stocks

Table-5 presents time series of average abnormal returns around date of buyback

approval for the sample of 64 open market buybacks through stock exchanges.

These abnormal returns are excess returns over returns on the S&P CNX 500 index.

Column 1 identifies the trading day relative to day 0 (approval day). Results under

columns 2-6 are related to the case of closing price based return computation.

Column-2 presents daily average abnormal return (AAR) , column 3 reports the

number(percentage) of those abnormal returns which are positive. Column 4 reports

cumulative average abnormal return (CAAR). Column 5 reports the cross-sectional

standard deviation of the daily abnormal returns for each trading day and t-statistic

is reported under column 6. Similar results for the case of weighted average price

based return computation are presented under columns 7-11.

Table-5 about hereIn the case of closing price based returns, trading days -5, -4 and -1 reported AAR of

3.27%, 2.27% and 1.43%, respectively. These returns are statistically significant at

levels 0.01 and above. The positive AARs for these days are further supported by

majority of positive abnormal returns of individual securities. Significant positive

abnormal returns for day -5 and -1 days can be attributed to the fact that companies

communicate the date of board meeting to consider buyback in advance to stock

exchange. The high positive abnormal return for -5 and -4 days can be attributed to


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over-reaction to information. Significant positive abnormal return for day -1 can be

because of availability of information through electronic media a day before it is

announced through print media. The over-reaction seems to have been corrected on

days +3 and +4 which reported significant negative AAR of 1.65% and 0.93%,

respectively. Overall cumulative average abnormal returns (CAARs) for the window

of 21 trading days around the announcement of buyback approval is 5.53%

Similar results are reported for the case of weighted average price based returns,

except that in addition to -5,-4,-1 days significant positive AARs are observed on day

0 as well. Trading days -5 and -4 reported significant positive AARs of 3.01% and

2.54%, respectively, whereas, trading day -1 and 0 reported significant positive AAR

of 1.16% and 1.50%, respectively. The initial overreaction to the announcement

seems to have corrected on +3 and +4 days which have reported significant negative

AARs of 1.46% and 1.17%, respectively. Overall cumulative average abnormal

returns (CAARs) for the window of 21 trading days around the announcement of

buyback approval is 6.16%

In addition, three day announcement period (-1,0,and +1 trading days) cumulative

average abnormal returns (CAARs) are computed. This period is expected to

capture early reaction, timely reaction and delayed reaction to the announcement.

For the case of closing price based returns the three day CAAR is 3.76% and for the

case of weighted average price based returns it is 4.41% (see table-7). Both the

returns are statistically significant.

Figure-1 portrays the cumulative average abnormal returns (CAARs) graphically

for closing price based returns and for weighted average price based returns,

respectively. The CAAR is presented to demonstrate that the announcement impactis not a temporary price response. While there has been over-reaction and

correction, the announcement of buyback approval has created CAAR of 5.53% (for

closing price based returns) and 6.16% ( for weighted average price based returns)

over the period of 21 trading days around the announcement of buyback approval.


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21

Fig-1 about herePositive average abnormal returns resulting from the announcement of approval of

buyback are apparently consistent with information effect. Investors perceive the

announcement as positive information. Thus, the null hypothesis (H0) about the

effect of announcement of buyback approval is rejected.

8.2 Announcement Effect Approval of Buyback for Case-2 where average daily

logarithmic returns on the sample stocks during one year period ending one month

prior to the approval of buyback is considered as expected return on the sample

stocks

Table-6 presents time series of average abnormal returns around date of buyback

approval for the sample of 64 open market buybacks through stock exchanges.

These abnormal returns are excess returns over average daily logarithmic returns

during one year period ending one month prior to the approval of buyback.

Table-6 about hereIn the case of closing price based returns, trading days -5 and -1 reported AAR of

2.97% and 1.76%, respectively. These returns are statistically significant at levels

0.01 and above. The positive AARs for these days are further supported by majority

of positive abnormal returns of individual securities. The over-reaction seems to

have been corrected on +3 and +4 days which reported negative AAR of 1.16% and

0.93%(significant at 0.02 level). Overall cumulative average abnormal returns

(CAARs) for the window of 21 trading days around the announcement of buyback

approval is 9.88%.

Similar results are reported for the case of weighted average price based returns,

except that in addition to -5,-4,-1 days significant positive AARs are observed on day

0 as well. Trading days -5 and -4 reported significant positive AARs of 2.74% and

2.55%, respectively, whereas, trading days -1 and 0 reported significant positive


22/36

22

AAR of 1.60% and 1.83%, respectively. The initial overreaction to the announcement

seems to have corrected on +3 and +4 days which have reported significant negative

AARs of 0.83% and 1.00% (significant at 0.05 level), respectively. Overall

cumulative average abnormal returns (CAARs) for the window of 21 trading days

around the announcement of buyback approval is 11.32%

In addition, three day announcement period (-1,0,and +1 trading days) CAARs are

computed. For the case of closing price based returns the three day CAAR is 2.94%

and for the case of weighted average price based returns it is 4.35% (see table-7).

Both the returns are statistically significant.

Table-7 about hereFigure-2 portrays the cumulative average abnormal returns (CAARs) graphically

for closing price based returns and for weighted average price based returns,

respectively. The CAAR is presented to demonstrate that the announcement impact

is not a temporary price response. While there has been over-reaction and

correction, the announcement of buyback approval has created CAAR of 9.88% (for

closing price based returns) and 11.32% ( for weighted average price based returns)

over the period of 21 trading days around the announcement of buyback approval.

Fig-3 about hereThere are no previous studies conducted to analyze the effect of the announcement

of approval of buybacks, neither in India nor elsewhere. Therefore, the results are

not comparable

Positive average abnormal returns resulting from the announcement of approval of

buyback are apparently consistent with information effect. Investors perceive the

announcement as positive information. Thus, the null hypothesis (H1) about the

effect of announcement of buyback approval is rejected even in the case where

historical daily returns are considered as expected returns.


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23

9. CONCLUSIONSThe objective of this study is to analyze the announcement effect of open market

share buyback approval.

This study finds evidence of significant effect of the announcement of buyback

approvals on the stock values. It is also found that the positive effect of the

announcements is sustained.

Based on the evidence, it can be concluded that investors apparently perceive

buybacks as positive signal. The results are consistent with information signaling

hypothesisof share buybacks.

10. FUTURE WORK As continuation of the study, future work will include addressing the following

questions related to open market share buybacks:

What is the wealth effect of the share buybacks? How the wealth created by

the share buyback is distributed between tendering and non-tendering

shareholders?

If the share buyback is used as information signaling device (alternatively, if

the share buyback is perceived as information signal by investors), is the

signal credible? Does the operating performance of buyback firms improve

significantly?

Does the long-term stock market performance of the buyback firms is

significantly different from non-buyback firms?

Is the improvement in operating and stock-market performance of the

buyback firms is driven by pre-buyback downward earnings management?

As of now, none of the studies on Indian share buybacks have looked into the above

aspects of share buyback.


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24

Table1:Sampledistributionbyyear

Year N Fraction(%)

2003 1 2

2004 4 6

2005 5 8

2006

5

8

2007 4 6

2008 19 30

2009 23 36

2010* 3 5

Total 64 100.00

*tillJune

Table2:Summarystatisticsforsamplecharacteristics

Characteristic

Mean

Median

High

Low

Buybackpremiumrelativetoclosingprice

onedaypriortoapprovalofbuyback 38.67% 25.76% 165.90% 2.80%

Min.percentageofoutstandingtobeboughtback 6.22% 4.89% 25% 0.17%

Maximumamountallocatedforbuyback(Rs.

Millions) 1113.49 213.50 11000.00 5.56

Prebuybackpromoters'holding 48.66% 48.65% 88.16% 2.77%

Expectedpostbuybackpromoters'holding 51.73% 53.69% 88.50% 2.93%

ThreedayCPbased CAAR1 2.7%** 2.50% 38.20% 12.00%

ThreedayWAPbasedCAAR1 3.49%** 2.77% 39.94% 11.59%

ThreedayCPbased CAAR2 2.94%** 3.16% 40.04% 15.09%

ThreedayWAPbasedCAAR2 4.35%*** 3.06% 41.60% 13.64%

CP:closingprice;WAP:weightedaverageprice;

CAAR:cumulativeaverageabnormalreturn

1forthe

case

where

return

on

the

S&P

CNX

500

index

is

considered

as

expected

return

on

the

stock

2forthecasewhereaveragedailyreturnonthestockduringoneyearperiodendingonemonthpriortotheapprovalor

**significantlydifferentfromzeroat0.01level.

***significantlydifferentfromzeroat0.001level


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25

Table3:ReasonsforBuyback

Reason Frequency

1.ToimproveEPS,RONW,

andoverallshareholdervalue 64

2.To

utilize

surplus

funds

34

3.Toprovideexitroutewithout

adverseimpactonprice 33

4.Toreflectconfidenceof

managementinfutureprospects 4

5.Tosignalundervaluationof

stock 2

Table4:Sampledistributionbythedayofannouncement

Day Frequency Percentage

Sat&Sun 3 5

Mon 14 22

Tue 10 16

Wed 8 13

Thu

12

19

Fri 17 27

Total 64 100


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Table5:AnnouncementEffectofApprovalofBuyback

Case1:ReturnsontheS&PCNX500indexisconsideredasexpectedreturns

ClosingPrice(CP) BasedReturns(N=64) WeightedAveragePrice(WAP)Based

Day AAR PositiveARs(%) CAAR SD tvalue AAR PositiveARs(%) C

10 0.31% 34(54) 0.31% 4.73% 0.5265 0.47% 32(50) 0

9

0.52%

22

(35)

0.21%

4.21%

0.989

0.07%

25

(39)

0

8 0.27% 32(51) 0.07% 4.14% 0.5323 0.30% 30(47) 0

7 0.02% 29(46) 0.05% 3.83% 0.032 0.41% 32(50) 0

6 0.74% 30(48) 0.79% 5.02% 1.195 0.41% 31(48) 1

5 3.27%**** 40(63) 4.06% 5.79% 4.551 3.01%**** 46(72) 4

4 2.27%* 39(62) 6.34% 6.61% 2.779 2.54%*** 41(64) 6

3 0.15% 31(49) 6.19% 3.86% 0.3039 0.28% 33(52) 6

2 0.01% 29(46) 6.21% 4.15% 0.02 0.34% 32(50) 6

1 1.43%*** 46(73) 7.64% 3.45% 3.348 1.16%** 41(64) 7

0 0.96% 32(51) 8.60% 4.45% 1.75 1.50%** 47(73) 9

1

0.30%

34(54)

8.91%

5.48% 0.445

0.84%

32

(50)

10

2 0.51% 25(40) 8.40% 4.46% 0.9207 0.75% 24(38) 9

3 1.65%**** 15(24) 6.74% 3.03% 4.406 1.46%**** 16(25) 7

4 0.93%* 26(41) 5.81% 3.00% 2.5082 1.17%** 24(38) 6

5 0.26% 26(41) 5.55% 2.65% 0.7875 0.31% 27(42) 6

6 0.21% 26(41) 5.34% 2.44% 0.7053 0.48% 24(38) 5

7 0.70% 28(44) 4.64% 2.67% 2.1124 0.51% 24(38) 5

8 0.41% 30(48) 5.05% 3.31% 0.9915 0.08% 26(41) 5

9 0.19% 28(44) 5.24% 3.65% 0.4154 0.33% 30(47) 5

10 0.29% 30(48) 5.53% 3.01% 0.7845 0.39% 33(52) 6

CP:closing

price;

WAP:

weighted

average

price

AAR:

average

abnormal

return;

AR:

abnormal

return;

CAARs:

cumulative

ave

SD:standarddeviationofabnormalreturns

*significantat0.01level:**significantat0.005level;***significantat0.002level;****significantat0.001level(alltwot


27/36

Table6:AnnouncementEffectofApprovalofBuyback(N=64)

Case2:Averagedailylogarithmicreturnsonthestockduringoneyearperiodending

Onepriortotheapprovalofbuybackisconsideredasexpectedreturn

CPBasedReturns WAPBasedReturns

Day

AAR

PositiveARs

(%)

CAAR

SD

tvalue

AAR

PositiveARs

(%)

10 0.38% 40(63) 0.38% 5.27% 0.582 0.65% 39(61)

9 0.41% 30(47) 0.02% 4.07% 0.798 0.30% 33(52)

8 0.27% 32(50) 0.24% 4.28% 0.497 0.34% 26(41)

7 0.35% 35(64) 0.60% 4.67% 0.606 0.68% 34(53)

6 1.14% 35(64) 1.73% 5.21% 1.747 0.91% 33(52)

5 2.97%**** 41(64) 4.70% 5.95% 3.995 2.74%**** 39(61)

4 2.35% 37(58) 7.06% 7.26% 2.594 2.55%*** 41(64)

3 0.11% 35(55) 6.94% 4.18% 0.216 0.22% 38(59)

2 0.73% 37(58) 7.67% 4.71% 1.234 0.37% 35(55)

1

1.76%****

46

(72)

9.43%

3.85%

3.648

1.60%****

42

(66)

0 0.61% 34(53) 10.04% 4.49% 1.085 1.83%* 42(66)

1 0.58% 31(48) 10.61% 6.06% 0.764 0.92% 33(52)

2 0.02% 29(45) 10.64% 4.71% 0.042 0.34% 25(39)

3 1.16% 28(44) 9.48% 3.79% 2.450 0.83% 27(42)

4 0.93% 23(36) 8.55% 2.84% 2.617 0.01% 26(41)

5 0.05% 31(48) 8.60% 3.02% 0.124 0.07% 29(45)

6 0.49% 33(52) 9.08% 2.92% 1.334 0.10% 33(52)

7 0.68% 29(45) 8.41% 2.95% 1.836 0.35% 28(44)

8 0.46% 32(50) 8.87% 3.59% 1.032 0.13% 35(55)

9 0.50% 24(38) 9.37% 3.73% 1.075 0.78% 37(58)

10 0.51% 31(48) 9.88% 3.32% 1.223 0.49% 35(55)

CP:closingprice; WAP:weightedaveragepriceAAR:averageabnormalreturn;AR:abnormalreturns;CAARs:cumulativeav

standarddeviationofabnormalreturns

*significantat0.01level:**significantat0.005level;***significantat0.002level;****significantat0.001level(alltwot


28/36

Table7:Threeday(1to+1days)cumulativeaverageabnormalreturns

(CAARs)

Return SD tvalue

ForthecasewheretheS&PCNX500returns aretakenasbenchmarkreturns

Closingpricebasedreturns 3.76%** 10.84% 2.774

Weightedaveragepricebasedreturns 4.41%*** 11.95% 2.955

Forthecasewhereaveragedailyreturnsduringoneyearperiodending

onemonthpriortobuybackapprovaltakenasbenchmarkreturns

Closingpricebasedreturns 2.94%** 8.74% 2.683

Weightedaveragepricebasedreturns 4.35%**** 10.00% 3.481

** significant at 0.01 level; *** significant at 0.005 level ; ****significant at 0.001 level(all two-tailed tests)


29/36

CP: closing price; WAP: weighted average price; CAAR: cumulative average abnormal retu

Figure-1

2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10

CAAR

TradingDays

EffectofapprovallofsharebuybacksCase1:Marketreturnsconsideredasexpectedreturns


30/36

CP: closing price; WAP: weighted average price; CAAR: cumulative average abnormal retu

Figure-2

2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10

CAAR

TradingDay

Effectofapprovalofsharebuyback

Case:2:Historicalreturnsisconsideredasexpectedretu


31/36

31

Appendix1:BetasandRsquaresvalues fortheSampleCompanieswhichhave

undertakenopenmarketbuybacksthroughstockexchanges

SNo Company Beta1 RSquare

1 Beta

2 Rsquare

2

1 BritaniaIndustriesLtd 0.24 0.06 0.09 0.01

2 SolitaireMachinetoolsLtd 0.21 0.001 0.12 0.008

3 MastekLtd(1) 1.23 0.17 0.92 0.1

4 GodrejConsumerProductsLtd(1) 0.42 0.068 0.15 0.008

5 RelianceIndustriesLtd 1.09 0.7 0.11 0.01

6 DILLtd 0.88 0.23 0.93 0.27

7 PolarisSoftwareLabLtd 1.35 0.57 1.34 0.58

8 BergerPaintsLtd 0.51 0.01 0.56 0.01

9 GodrejConsumerProductsLtd(2) 0.23 0.05 0.23 0.05

10 IndiabullsFinancialServicdesLtd 1.42 0.11 1.57 0.13

11

SRFLtd

(1)

1.78 0.36 2.02

0.42

12 RevathiEquipmentsLtd 0.67 0.16 0.8 0.21

13 NatcoPharmaLtd 0.57 0.14 0.64 0.17

14 CarolInfoServicesLtd 0.74 0.13 0.89 0.18

15 ACESoftwareExports Ltd 0.63 0.07 0.72 0.09

16 GujaratAmbujaExportsLtd 0.75 0.12 0.84 0.15

17 MROTekLtd(1) 1.32 0.32 1.47 0.38

18 HindustalUnileverLtd 0.09 0.004 0.09 0.004

19 MastekLtd(2) 0.51 0.12 0.53 0.14

20 PatniComputerSystemsLtd 0.08 0.002 0.11 0.005

21

MadrasCements

Ltd

0.68 0.24 0.75

0.27

22 GreatOffshoreLtd 0.98 0.36 1.06 0.43

23 SaskenCommunicationTechLtd 1.19 0.32 1.3 0.39

24 SRFLtd(2) 1.04 0.33 1.5 0.42

25 DLF Ltd 1.45 0.61 1.46 0.63

26 GatewayDistriparksLtd 0.03 0.0003 0.3 0.0003

27 GujaratFlorochemicalsLtd 0.12 0.0026 0.08 0.0013

28 SuranaTelecomandPowerLtd 0.85 0.21 0.96 0.28

29 IpcaLabLtd 0.23 0.07 0.24 0.08

30 SuprmeIndustriesLtd 0.66 0.22 0.72 0.26

31

EIDParry

Ltd

0.48 0.0025 0.42

0.009

32 HydroS&SIndustriesLtd 0.56 0.08 0.66 0.11

33 TTKHealthCareLtd 0.14 0.01 0.26 0.07

34 TVTodayNetworkLtd 0.85 0.3 0.96 0.35

35 ZenTechnologiesLtd 0.45 0.07 0.86 0.24

36 SandeshLtdLtd 0.09 0.004 0.18 0.029

37 GitanjaliGemsLtd 0.87 0.29 0.97 0.32


32/36

32

38 GodrejIndustriesLtd 1.18 0.08 2.33 0.78

39 SelanExplorationLtd 0.85 0.2 0.96 0.24

40 AustinEngineeringCo.Ltd 0.67 0.24 0.73 0.27

41 MangalamCementsLtd 0.73 0.33 0.8 0.38

42 KilburnEngineeringLtd 0.83 0.25 1.01 0.18

43

LKPFinance

Ltd

0.25 0.03 0.65

0.18

44 MROTekLtd(2) 1.05 0.37 1.17 0.41

45 GSSAmericaInfotechLtd 1.05 0.24 1.13 0.25

46 ApolloTyresLtd 0.59 0.25 0.66 0.29

47 IndiaBullsSecuritiesLtd 0.91 0.26 1.05 0.98

48 PennarIndustriesLtd 0.02 0.0002 0.58 0.27

49 DaiIchiKarkariaLtd 0.04 0.009 0.06 0.082

50 AvantelLtd 0.32 0.03 0.83 0.39

51 MerckLtd 0.26 0.17 0.29 0.19

52 DeccanChronicleHoldingsLtd 1.07 0.36 1.2 0.4

53

JindalPolyfilms

Ltd

0.46 0.13 0.53

0.15

54 ProvogueIndiaLtd 0.51 0.12 0.6 0.15

55 SRFLtd(3) 0.57 0.26 0.67 0.32

56 BhagyanagarIndiaLtd 0.51 0.11 0.83 0.27

57 PoddarPigmentsLtd 0.15 0.01 0.49 0.07

58 GoldiamInternationalLtd 0.64 0.17 0.75 0.2

59 ApcotexIndustriesLtd 0.05 0.001 0.4 0.004

60 FDCLtd 0.22 0.01 1.08 0.74

61 TIPSIndustriesLtd 0.23 0.01 0.82 0.15

62 ManaksiaLtd 0.53 0.06 0.89 0.16

63

PanaceaLtd

0.42 0.03 0.72

0.14

64 GeodesicLtd 0.98 0.12 0.97 0.49

Beta1:Valueofbeta withS&PCNX50Indexasmarketportfolio

Rsquare1:ValueofRsquarewithS&PCNX50 Indexasmarketportfolio

Beta2:ValueofbetawithS&PCNX500Index asmarketportfolio

Rsquare2:valueofRsquarewithS&PCNX500 Indexasmarketportfolio

AR:averagedailyreturns

Theabovevaluesarecomputedusingdaily logarithmicreturnsforoneyearperiod

endingonemonthpriortothepublicannouncementofbuyback.


33/36

33

Appendix2:ListofSampleCompanieswhichhaveundertaken

openmarketbuybacksthroughstockexchanges

SNo Company

YearofBoard

Approval

1 BritaniaIndustriesLtd 2003

2

SolitaireMachine

tools

Ltd

2004

3 MastekLtd(1) 2004

4 GodrejConsumerProductsLtd(1) 2004

5 RelianceIndustriesLtd 2004

6 DILLtd 2005

7 PolarisSoftwareLabLtd 2005

8 BergerPaintsLtd 2005

9 GodrejConsumerProductsLtd(2) 2005

10 IndiabullsFinancialServicdesLtd 2005

11 SRFLtd(1) 2006

12

RevathiEquipments

Ltd

2006

13 NatcoPharmaLtd 2006

14 CarolInfoServicesLtd 2006

15 ACESoftwareExports Ltd 2006

16 GujaratAmbujaExportsLtd 2007

17 MROTekLtd(1) 2007

18 HindustalUnileverLtd 2007

19 MastekLtd(2) 2007

20 PatniComputerSystemsLtd 2008

21 MadrasCementsLtd 2008

22

Great

Offshore

Ltd

2008

23 SaskenCommunicationTechLtd 2008

24 SRFLtd(2) 2008

25 DLF Ltd 2008

26 GatewayDistriparksLtd 2008

27 GujaratFlorochemicalsLtd 2008

28 SuranaTelecomandPowerLtd 2008

29 IPCALabLtd 2008

30 SuprmeIndustriesLtd 2008

31 EIDParryLtd 2008

32 HydroS&SLtd 2008

33 TTKHealthCareLtd 2008

34 TVTodayNetworkLtd 2008

35 ZenTechnologiesLtd 2008

36 SandeshLtdLtd 2008

37 GitanjaliGemsLtd 2008

38 GodrejIndustriesLtd 2008

39 SelanExplorationLtd 2009


34/36

34

40 AustinEngineeringCo.Ltd 2009

41 MangalamCementsLtd 2009

42 KilburnEngineeringLtd 2009

43 LKPFinanceLtd 2009

44 MROTekLtd(2) 2009

45

GSSAmerica

Infotech

Ltd

2009

46 ApolloTyresLtd 2009

47 IndiaBullsSecuritiesLtd 2009

48 PennarIndustriesLtd 2009

49 DaiIchiKarkariaLtd 2009

50 AvantelLtd 2009

51 MerckLtd 2009

52 DeccanChronicleHoldingsLtd 2009

53 JindalPolyfilmsLtd 2009

54 ProvogueIndiaLtd 2009

55

SRFLtd

(3)

2009

56 BhagyanagarIndiaLtd 2009

57 PoddarPigmentsLtd 2009

58 GoldiamInternationalLtd 2009

59 ApcotexIndustriesLtd 2009

60 FDCLtd 2009

61 TIPSIndustriesLtd 2009

62 ManaksiaLtd 2010

63 PanaceaLtd 2010

64 GeodesicLtd 2010


35/36

35

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