Stock Price Responses to the Announcement of Buyback of Shares in India.

Abstract

In this paper an attempt has been made to examine the short term market reaction to the buyback announcement on stock price in India.   A number of studies have examined the effect of buyback on share price behaviour and empirical evidence from the prior studies report that negative long run abnormal returns following the buyback announcement in U S, U K and Canada. Market reaction in the UK differs from that in the US for short term market. In this direction an empirical study has been carried out to know the Indian stock markets reaction to Buy-back of shares. This study is confined shares buyback of listed companies for the period 1996 to 2006. The sample consists of 106 companies, which are listed in the BSE.  The adjusted daily stock prices and BSE 200 index are collected for each of the firms from day – 331 to + 30. If the share price data is not available due to non-trading, such companies are eliminated.  In order to analyze the impact of the announcement of buyback of shares on stock price, the event period is centered on the announcement date of buyback of shares. The announcement date is designated as day “0” in the event period and used 61 days event period, i.e. 30 trading days before the announcement of the buyback of shares to 30 trading days after the announcement of the buyback of shares, 0 being the day of the announcement of the buyback of shares. The methodology of the study involves use of market model which was developed and suggested by Sharpe (1963). The effect of stock prices is measured in an event period using the abnormal return associated with this event. The researcher computed the Expected Returns (ER), Abnormal Returns (AR), Average Abnormal Returns (AAR) and Cumulative Average Abnormal Returns (CAARs) to examine the stock price reaction. To measure the stock price response to the buyback of shares announcement, it is necessary to segregate the returns attributed to the market movement and those that are not attributed to the market movement, but to buyback announcement. This adjustment is made using the market model. The estimation period used was -31 days to -330 days. If there is no trading in the market on the announcement day, the immediate next trading day is considered as event-day for those firms. To examine the statistical significance of the average abnormal returns z–statistic is constructed and the hypothesis that the AAR is equal to zero is tested. The study reveals, buyback announcement have not provided any additional information to the market. Market has not found any news in the announcement as revealed by the continuing trend that started before the announcement. In the nutshell, study shows negative and insignificant abnormal returns for majority of the days in the event period.