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 paper
examines the characteristics of share repurchasing firms and market reaction to multiple offers in India. The study finds
limited offers of multiple repurchases. Only 30% of initial repurchases return to the market, with the offer of second share
buyback with an average time gap of 1.64 years. Interest in share buyback program me has grown phenomenally
worldwide over the past twenty years. Large firms with more variable operating income, lower, MTB ratios and paying lower
dividends are frequent repurchases while small firms with stable operating income, higher MTB and payout ratios are
infrequent repurchases.
Market reaction to multiple offers is in contradiction to signaling hypothesis predictions. The initialor infrequent repurchases
earn lower announcement day returns than frequent or subsequent repurchases. Further, the overall Cumulative Abnormal
Return (CAR) is negative in post-offer period indicating that all positive returns are realized in pre-offer period only.
We conclude that rather than signaling hypothesis, market reaction to subsequent buybacks is better explained by free cash
flow hypothesis. The signaling hypothesis has been viewed as a basic explanation for the share repurchases According to
this hypothesis, manager's employ repurchases to reduce information asymmetry and signal their desire for improved
market valuations. The announcement of premium buybacks conveys to the market the managers' confidence that the
share is worth more than current market value and also relating to the fundamentals or the future increase in cash flows of
the firms.

Data and Methodology

Sample Selection:
Group has first identified the companies who has issued multiple buybacks between
2000 ~2008 and then shortlisted the companied listed in NSE stock Exchange of India.
149 companies were shortlisted then a check has been performed to further shortlisted
the companies meeting following criteria:

The date of last 200 days and 30 days after announcement must be available on
the public portal such Yahoo finance, Money Control etc.

Based on above Criteria, we have shortlisted following 29 companies for our study:
S.
No.
1

Company Name

Britannia
Britannia Second
Buyback

Kesoram

Raymond

Reliance

OCL India

Natco Pharma

Venky India

Sun Pharmacy 1st

10

Aarti Drugs

11
12

Mastekindia
Jayshree Tea

Event
Date
28/08/
2001
26/08/
2002
28/04/
2000
01/06/
2001
27/12/
2004
27/12/
2004
20/01/
2003
09/11/
2002
31/12/
2002
12/09/
2002
20/05/
2004
24/05/
1

13

Hindalco

14

GKS Healthcare

15
16
17
18
19
20
21
22
23
24
25
26
27
28
29

GG Dandekar
Fineline Second
Fineline First
Finolex Third
Finolex Second
Finolex First
Chordia
Bombay Dyeing
Second
Bombay Dyeing
Blue Star
Bhagyanagar
Apollo Finance
Oerlikon
Ace Software
Abbott Industries

2001
30/01/
2002
12/02/
2004
18/01/
2002
30/08/
2004
17/05/
2003
31/07/
2002
24/04/
2002
04/11/
2001
09/02/
2002
28/10/
2002
29/08/
2001
02/05/
2002
29/08/
2001
27/12/
2004
23/01/
2002
10/01/
2003
26/08/
2006

Research Methodology
The SEBI's Status Report on Buybacks in India shows 149 offers till 31st March 2008. We use this official report in
computing excess returns for multiple buybacks. A list of 27 announcements out of 149 has been selected for analysis of
market reaction and the following two criteria are used for inclusion in the sample
Availability of public/media announcement date
Price data for all trading days included in estimation and event periods.
The reconciliation of sample units with total announcements is provided in subsequent pages. The study uses market model
for computing abnormal returns involved in buyback announcements. According to this model, the abnormal returns on a
given trading day, t, for a given security, i, are computed by the following formula:

Where,
AR it is the abnormal return for firm/security i on day t;
R it is the return on security i on day t;
R mt is a proxy measure of the return on the market portfolio
i and i are OLS estimates of the market model parameters and are intercept and beta coefficients of security i
respectively. We estimate the values of various parameters using the following equation:

R mtis estimated using BSE-500 index as a proxy for market portfolio and
$ it is a statisticalerror having a zero value.
An estimation period of 200 days is used for predicting the parameters of market model. In addition to 41-day as event
window, we use short-windows like 3-day, 5-day, 7-day, 11-day and 21-day. A 41-day event period includes 20 days before
announcement (-20 days), announcement date (0) and 20 days subsequent to announcement date (+20 days).
The required information for the study was primarily accessed from Yahoo Finance. Earlier, public or media announcement
date was taken as announcement date. The adjusted daily closing share prices of sample offers are employed for
computing excess announcement returns.
The average abnormal return (AAR) on day t for all firms in the sample is given by the Following formula:

The AAR and CAR are analyzed in the study for:

All buyback announcements of companies for which complete information is available
First buybacks and subsequent buybacks

Time period of study

This is an event study where we have taken 15 different companies who have announced bonus
in the period from 2010 to 2015. The time line of this study is defined is below:

T0:

T
T
T
1
2
0
Event days the announcement date

T
3
3

T1:

140 days before the event date (announcement date)

T2:

20 days before the event date (announcement date)

T3:

20 days after the event date (announcement date)

T1T2:

Estimation Period

T2T3:

Event Period

Objectives
This event study to verify the abnormal performance associated with the event is
conducted with following objectives:
1 To understand the stock price reaction on the information of Buybacks.
2 To calculate the Abnormal return, Average abnormal return and Cumulative
abnormal return and performing statistical test for verify the significance.
3 Hypotheses testing and interpretation of the results.

Hypothesis Tested:
Following hypotheses are tested in this study by using parametric and non-parametric
statistical tests.

1 Linear relationship of market model

Following OLS regression is used to determine the parameters a and and residual
during estimation period:

Tested Null hypothesis H0: =0 (that there is no linear relationship between R j and Rmt

Statistic t-test is performed for hypotheses testing and for this and following t statics is used:
4

Where s.e.( ) = Standard Error of =

Test is performed at 5% level of significance of a= 0.05

2 Statistical test of Abnormal returns

H0: Mean Abnormal Return =0 (that event has no effect on marker price)
Abnormal Return is calculated from Market Model:

Where; Rj,t : Rate of return of stock j on the Day T

Rm,t : Rate of return of market index (m) on the Day T
Ejt : Error term of the stock j on day T having zero mean Variance
Average abnormal returns at time t for event period from 1 to 2

N is the number of firms in the sample

t is the defined trading days

Firstly, traditional t-test is performed for each daily abnormal return:

t- Statics used as for the test is
5

Where X: Average Abnormal return

S: Standard Deviation of Sample of N stocks
Test is performed at 10% level of significance of a= 0.1

Standardized Abnormal return is estimated by dividing abnormal return with its own
estimate of variance it gives maximum likelihood estimate of the variance of AR j,t
This standardization process helps to ensure that no single firm in the sample is
dominating the result.

Rm,tandRm are the return and the mean return on the market on K day estimation
period

A total Standardized abnormal return is estimated as:

And the variance of TSARt

Test statistics for Standard Patell Z test is as follows:

Where;

Zt
= Z-statistics of each day
TSARt
= Total Standardized abnormal returns
Kj
=Number of observed Trading Days
N
= Number of firms in the sample

Test is performed at 10% level of significance of a= 0.1

Test statistics for Variance adjusted Z test is as follows:

This testing procedure is robust under condition of event induced variance and it will
avoid the impact of higher variance of returns due non identical effect of the event
across the firm.
Test is performed at 10% level of significance of a= 0.1

Test statistics for Non parametric Z test is as follows:

This test is conducted with other parametric test to verify that results are not derived by
outliers. Cowans nonparametric generalized sign test is used here:
H0: Fraction of positive abnormal returns is following the positive abnormal return in the
estimation period
Fraction of Positive abnormal Returns

Generalized test statistics:

Test is performed at 10% level of significance of a= 0.1

3 Statistical test of Cumulative Abnormal returns

CAR is used to track abnormal returns over a number of trading days, since outcomes of
many events are not immediately known.
Cumulative abnormal return for firm j over t1 to t2 is estimates as:

Cumulative Average abnormal return

Variance of Cumulative Average abnormal return

Traditional t-test is performed for each daily abnormal return:

H0: CAAR =0

t- Statics used as for the test is

Where X: Average Abnormal return

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S: Standard Deviation of Sample of N stocks

Test is performed at 10% level of significance of a= 0.1

Tools used
The complete analysis is done by using MS Excel. The calculation sheet is attached with
this report

Table 1

Inference (Table 1); shows the beta (i.e. sensitivity) of the sample stocks under consideration with
respect to NSE Index) at 5% level of Significance. and total universe of 29 Companies. The R

of the

regressions of daily returns of the stock on the daily returns on indices are also provided for the period. Beta
coefficients are highly significant for 19 companies out of total of 29 companies, indicating that risk is an
important determinant of companys return.

Table 2
AAR, MAR & T Stats for Complete 29 Companies.

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Inference (Table 2); Indicates that for 20 days before Announcement Date, there is no
pattern of abnormal returns rather, 13 days out of -20 Days provide Positive AAR values. Day T18, T-15, T-14, T-5 & T-1 reflects higher level of significance as per traditional T test @ 10% level.
This can be attributed to possible leakage of Information by the Board or Insider Trading.

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While T+20 Days reflects a trend of normal returns with maximum number of days
providing positive AAR values and higher level of significance as per traditional T test @ 10%
level. 14 days out of 0 & +20 Days provide Positive AAR values.
Table 3
AAR, MAR & T Stats for Complete 23 Companies having Multiple Buy back.

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Table 4
Shareholders response to Buy back of shares.

The success of the buyback program is inversely proportional to the number of shares bought back. If the shares
have not been bought back, the buyback program will be seen as most successful as it achieved the objective 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 investors. However, most of the sample buyback
announcements have received a positive response from the market indicating that the shareholders and investors did not
have faith in the ability of the companys management.

No of Companies with BB..

Less than 50%

10
10

Around 50%-99%
Total 100%

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As per the analysis of the above 27 Companies, it is interpreted that number of

companies having success in 100% buyback is very less. Hence it shows that for 20 companies
whose Buy back percentage was less than 100%, the company was able to impart confidence
among its shareholders.
In line with reference paper we see a similar trend of low percentage of buy back showing
increase in investors understanding.
Table 5
Buy Back and Shareholder's Wealth.

One can analyze the pattern of returns from the perspective of tendering(participating) and non-tendering (nonparticipating) shareholders. Return to tendering shareholders is the buyback premium while the returns to the non-tendering
shareholders are in the form of capital gains.
Inference (Table 5):
Out of 27 Companies, non-participating shareholders of 17 Companies suffered erosion of their capital, hence
supporting the argument that the buy backs in India are driven by motives not necessarily good for existing shareholders.
For 20 Companies out of 27of the companies spending on Buy backs resulted in decline in Book value and also resulted in
Market Price post 3 months from the date of announcement to less than that of Buy Back.

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Table 6
Positive and Negative Price variation from announcement date.

Following the Assumption 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
investor's enthusiasm and euphoria.
Inference (Table 6):
In 8 companies out of 27, there have been negative price variation since announcement date,
(i.e. Change in Price from AD to 3 months after AD) & for 8 companies Positive price variation is
less than 10%. Hence buy back not always leads to increase in long term share valuation.

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Table 7

Route adopted for buyback of shares has a significant impact on the success of the program. Price reaction to a
buyback announcement depends on both the type and terms of the buyback offer.
Inference (Table 7):
For companies which went through Tender Offer their Arithmetic Mean is only 7% in short Run, while that of companies
with Open Market offer it was 17%. But in Long Run, in terms of Price changes, companies with Tender offer had Mean of
5.68% than that of Open Market offer companies which was only 5.20%.
Hence in Contrast of the paper being followed, our findings are that if the objective of Buy back is to shore up share
market confidence that Open Market Offer is better.
The Hypothesis that Buy back through open market are more successful in meeting the objective of the program. This
is because open market offer act as deterrent to short sellers as the company can time the buy back during depressed
share prices.

Conclusion-

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It is strongly evident from this study, the stocks start showing positive abnormal returns for First Time Buybacks, but
with multiple buybacks the abnormal return reduces to a considerable level as compared to the first time buybacks.
Further, the overall Cumulative Abnormal Return (CAR) is positive in post-offer period indicating that all positive returns
are realized in post offer period only .hence, we can understand that Indian market is semi-strong market and signaling
hypothesis is consistent with the findings.

Reference

Market reaction of multiple share buyback in India, by R.L. Hyderabad

An Empirical Analysis to Share Buyback in India by Dr. A.K. Mishra
An Empirical Analysis of Market Reaction around the bonus issues in India by Dr. A.K.
Mishra

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