buy back behaviour

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    Buy Back Behavior of Indian

    Companies

    Introduction

    Buyback of shares relates to the company buying back its shares which it has issued earlier from the market. This pap

    examines the characteristics of share repurchasing firms and market reaction to multiple offers in India. The study find

    limited offers of multiple repurchases. Only 30% of initial repurchases return to the market with the offer of second shabuyback with an a!erage time gap of ".#$ years. Interest in share buyback program me has grown phenomena

    worldwide o!er the past twenty years. arge firms with more !ariable operating income lower &TB ratios and paying low

    di!idends are fre'uent repurchases while small firms with stable operating income higher &TB and payout ratios a

    infre'uent repurchases.

    &arket reaction to multiple offers is in contradiction to signaling hypothesis predictions. The initialor infre'uent repurchas

    earn lower announcement day returns than fre'uent or subse'uent repurchases. (urther the o!erall )umulati!e *bnorm

    +eturn ,)*+- is negati!e in postoffer period indicating that all positi!e returns are reali/ed in preoffer period only.

    e conclude that rather than signaling hypothesis market reaction to subse'uent buybacks is better explained by free ca

    flow hypothesis. The signaling hypothesis has been !iewed as a basic explanation for the share repurchases *ccording

    this hypothesis manager1s employ repurchases to reduce information asymmetry and signal their desire for impro!emarket !aluations. The announcement of premium buybacks con!eys to the market the managers1 confidence that t

    share is worth more than current market !alue and also relating to the fundamentals or the future increase in cash flows

    the firms.

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    Data and Methodology

    Sample Selection:

    Group has rst identied the companies who has issued multiple buybacks between

    2000 ~2008 and then shortlisted the companied listed in !" stock "#chan$e of India%

    &'( companies were shortlisted then a check has been performed to further shortlisted

    the companies meetin$ followin$ criteria)

    •  *he date of last 200 days and +0 days after announcement must be available on

    the public portal such ,ahoo nance- .oney Control etc%

    Based on above Criteria- we have shortlisted followin$ 2( companies for our study)

    S.No.

    Company NameEventDate

    & Britannia28/08/200&

    2Britannia !econdBuyback

    2/08/2002

    + 1esoram28/0'/2000

    ' aymond0&/0/

    200&

    3 eliance24/&2/200'

    5C6 India24/&2/200'

    4 atco 7harma20/0&/200+

    8 enky India0(/&&/

    2002

    ( !un 7harmacy &st+&/&2/2002

    &0 9arti :ru$s&2/0(/

    2002

    && .astekindia20/03/200'

    &2 ;ayshree *ea 2'/03/

    &

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    200&

    &+

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    here *+ it is the abnormal return for firm9security i on day t<

    + it is the return on security i on day t<

    + mt is a proxy measure of the return on the market portfolio

    =i and >i are O2 estimates of the market model parameters and are intercept and beta coefficients of securityrespecti!ely. e estimate the !alues of !arious parameters using the following e'uation;

    + mt is estimated using B2?00 index as a proxy for market portfolio [email protected] Ait is a statisticalerror ha!ing a /ero !alue.

     *n estimation period of 500 days is used for predicting the parameters of market model. In addition to $"day as e!ewindow we use shortwindows like 3day ?day 7day ""day and 5"day. * $"day e!ent period includes 50 days befoannouncement ,50 days- announcement date ,0- and 50 days subse'uent to announcement date ,50 days-.

    The re'uired information for the study was primarily accessed from Cahoo (inance. arlier public or media announceme

    date was taken as announcement date. The adDusted daily closing share prices of sample offers are employed fcomputing excess announcement returns.

    The a!erage abnormal return ,**+- on day t for all firms in the sample is gi!en by the (ollowing formula;

    The **+ and )*+ are analy/ed in the study for;

    8 *ll buyback announcements of companies for which complete information is a!ailable

    8 (irst buybacks and subse'uent buybacks

    Time period of study

     *his is an event study where we have taken &3 di>erent companies who have announced bonus

    in the period from 20&0 to 20&3% *he time line of this study is dened is below)

    T: Event days the announcement date

    +

    T

    !

    T

    "

    T

    T

    #

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    T!: !$ days %efore the event date &announcement date'

    T#: # days %efore the event date &announcement date'

    T": # days after the event date &announcement date'

    T!T#: Estimation (eriod

    T#T": Event (eriod

    )%*ectives

     *his event study to verify the abnormal performance associated with the event is

    conducted with followin$ ob?ectives)

    & *o understand the stock price reaction on the information of Buybacks%2 *o calculate the 9bnormal return- 9vera$e abnormal return and Cumulative

    abnormal return and performin$ statistical test for verify the si$nicance%+

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    Dhere s%e% AE !tandard "rror of A

    Test is performed at / level of signi0cance of a1 .

    # Statistical test of 2%normal returns

    ect on marker priceE

    9bnormal eturn is calculated from .arket .odel)

    DhereF ?-t ) ate of return of stock ? on the :ay *m-t ) ate of return of market inde# mE on the :ay *"?t ) "rror term of the stock ? on day * havin$ ero mean ariance

    9vera$e abnormal returns at time t for event period from H& to H2

    is the number of rms in the samplet is the dened tradin$ days

    =irstly- traditional [email protected] is performed for each daily abnormal return)

    t3 Statics used as for the test is

    3

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    Dhere ) 9vera$e 9bnormal return

    !) !tandard :eviation of !ample of stocks

    Test is performed at !/ level of signi0cance of a1 .!

    !tandardied 9bnormal return is estimated by dividin$ abnormal return with its own

    estimate of variance it $ives ma#imum likelihood estimate of the variance of 9  ?-t

     *his standardiation process helps to ensure that no sin$le rm in the sample is

    dominatin$ the result%

    m-tandm are the return and the mean return on the market on 1 day estimation

    period

    9 total !tandardied abnormal return is estimated as)

    9nd the variance of *!9t

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    Test statistics for Standard (atell 4 test is as follo5s:

    DhereF Jt [email protected] of each day *!9t *otal !tandardied abnormal returns1  ? umber of observed *radin$ :ays  umber of rms in the sample

    Test is performed at !/ level of signi0cance of a1 .!

    Test statistics for 6ariance ad*usted 4 test is as follo5s:

     *his testin$ procedure is robust under condition of event induced variance and it will

    avoid the impact of hi$her variance of returns due non identical e>ect of the event

    across the rm%

    Test is performed at !/ level of signi0cance of a1 .!

    Test statistics for Non 7parametric 4 test is as follo5s:

     *his test is conducted with other parametric test to verify that results are not derived by

    outliers% CowanKs nonparametric $eneralied si$n test is used here)

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    8enerali9ed test statistics:

    Test is performed at !/ level of signi0cance of a1 .!

    " Statistical test of Cumulative 2%normal returns

    C9 is used to track abnormal returns over a number of tradin$ days- since outcomes of

    many events are not immediately known%

    Cumulative abnormal return for rm ? over t& to t2 is estimates as)

    Cumulative 9vera$e abnormal return

    ariance of Cumulative 9vera$e abnormal return

     *raditional [email protected] is performed for each daily abnormal return)

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    !) !tandard :eviation of !ample of stocks

    Test is performed at !/ level of signi0cance of a1 .!

    Tools used

     *he complete analysis is done by usin$ .! "#cel% *he calculation sheet is attached with

    this report

    Table 1

    (

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      Inference (Table 1); shows the beta ,i.e. sensiti!ity- of the sample stocks under consideration with

    respect to E2 Index- at ?% le!el of 2ignificance. and total uni!erse of 54 )ompanies. The +5

    of the

    regressions of daily returns of the stock on the daily returns on indices are also pro!ided for the period. Beta

    coefficients are highly significant for "4 companies out of total of 54 companies indicating that risk is an

    important determinant of companyFs return.

    Table 2

     22R M2R ; T Stats for Complete #< Companies.

    &0

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      Inference &Ta%le #'= Indicates that for 20 days before 9nnouncement :ate- there is no

    pattern of abnormal returns rather- &+ days out of @20 :ays provide 7ositive 99 values% :ay *@

    &8- *@&3- *@&'- *@3 L *@& reMects hi$her level of si$nicance as per traditional * test N &0O level%

     *his can be attributed to possible leaka$e of Information by the Board or Insider *radin$%

    &&

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      Dhile *P20 :ays reMects a trend of normal returns with ma#imum number of days

    providin$ positive 99 values and hi$her level of si$nicance as per traditional * test N &0O

    level% &' days out of 0 L P20 :ays provide 7ositive 99 values%

    Table 3

    22R M2R ; T Stats for Complete #" Companies having Multiple >uy %ac-.

    &2

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    Table 4

    Shareholders response to >uy %ac- of shares.

      The success of the buyback program is in!ersely proportional to the number of shares bought back. If the shares

    ha!e not been bought back the buyback program will be seen as most successful as it achie!ed the obDecti!e of lending

    stability to the scrip. On the other hand if the entire numbers of shares are bought back it will imply that the buyback

    program was unsuccessful in imparting confidence to the in!estors. Gowe!er most of the sample buyback

    announcements ha!e recei!ed a positi!e response from the market indicating that the shareholders and in!estors did not

    ha!e faith in the ability of the companyFs management.

    &0

    &0

    4

    No of Companies 5ith >>..

    6ess than 30O

    9round [email protected]((O

     *otal &00O

    &+

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      9s per the analysis of the above 24 Companies- it is interpreted that number of

    companies havin$ success in &00O buyback is very less% uy >ac- and Shareholder?s @ealth.

      5ne can analy/e the pattern of returns from the perspecti!e of tendering,participating- and nontendering ,no

    participating- shareholders. +eturn to tendering shareholders is the buyback premium while the returns to the nontenderishareholders are in the form of capital gains.

    Inference (Table 5):

      Out of 57 )ompanies nonparticipating shareholders of "7 )ompanies suffered erosion of their capital hensupporting the argument that the buy backs in India are dri!en by moti!es not necessarily good for existing shareholder(or 50 )ompanies out of 57of the companies spending on Buy backs resulted in decline in Book !alue and also resulted &arket :rice post 3 months from the date of announcement to less than that of Buy Back.

    &'

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    Table 6

    (ositive and Negative (rice variation from announcement date.

      =ollowin$ the 9ssumption that Buy Back improves the valuation of the share- it is observed

    that the announcement lead to increase in share prices only for few sessions on account of

    investorQs enthusiasm and euphoria%

    Inference &Ta%le A':

      In 8 companies out of 24- there have been ne$ative price variation since announcement date-

    i%e% Chan$e in 7rice from 9: to + months after 9:E L for 8 companies 7ositive price variation is

    less than &0O%

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    Table 7

      +oute adopted for buyback of shares has a significant impact on the success of the program. :rice reaction to a

    buyback announcement depends on both the type and terms of the buyback offer.

    Inference (Table 7):

      (or companies which went through Tender Offer their *rithmetic &ean is only 7% in short +un while that of companies

    with Open &arket offer it was "7%. But in ong +un in terms of :rice changes companies with Tender offer had &ean of

    ?.#6% than that of Open &arket offer companies which was only ?.50%.

      Gence in )ontrast of the paper being followed our findings are that if the obDecti!e of Buy back is to shore up share

    market confidence that Open &arket Offer is better.

      The Gypothesis that Buy back through open market are more successful in meeting the obDecti!e of the program. Thisis because open market offer act as deterrent to short sellers as the company can time the buy back during depressed

    share prices.

    Conclusion3

    &

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      It is strongly e!ident from this study the stocks start showing positi!e abnormal returns for (irst Time Buybacks but

    with multiple buybacks the abnormal return reduces to a considerable le!el as compared to the first time buybacks.

    (urther the o!erall )umulati!e *bnormal +eturn ,)*+- is positi!e in postoffer period indicating that all positi!e returns

    are reali/ed in post offer period only .hence we can understand that Indian market is semistrong market and signaling

    hypothesis is consistent with the findings.

    Reference3

    • .arket reaction of multiple share buyback in India- by %6%