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The IUP Journal of Applied Finance

The Impact of Buyback Announcement on Indian IT Stock Prices: An Event Study Approach

Article Details

Pub. Date	: Jan, 2022
Product Name	: The IUP Journal of Applied Finance
Product Type	: Article
Product Code	: IJAF30122
Author Name	: Neetu Yadav
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 12

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Abstract

The paper examines the impact of share buyback on stock prices of the Indian Information Technology (IT) firms selected from Nifty 500. The event study methodology is used to analyze the impact of share buyback announcements of 13 IT companies. The data constitutes 24 buyback announcements during the period 2013-2019. The results indicate that all the IT companies in the sample have negative average abnormal returns, implying that the Indian stock market, with regard to IT firms, is very efficient to assimilate every information.

Introduction

The concept of buyback was introduced in the 1960s in the US and remained popular in the 1980s. Even today, buyback of shares is practiced frequently in the US and other countries. When the performance of a company is lagging, then share buybacks can look very attractive indeed. By purchasing its own shares, a company reduces its number of shares outstanding, which leads to an increase in earnings per share. Under the Securities and Exchange Commission (SEC) guidelines, the buyback of a share can be done in four possible ways: open market, fixed-price tender, Dutch auction and privately negotiating the purchase. Out of these, fixed-price tender offer and Dutch auction are more popular. This concept allows the companies to improve their earnings per share, return on capital and long-term shareholder value. It also helps in achieving the optimum capital structure. Later, the wave of share buyback became strong in European countries also.

In India, share buyback was first introduced in 1998 by the Securities and Exchange Board of India (SEBI) under Section 77A of the Companies Act, 1956. The introduction of buyback around the world has put pressure on the Indian corporate sector to allow them to buy back shares so that they can also use their internal surplus cash. The Bombay Stock Exchange (BSE) defines buyback as: "a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price". There can be numerous reasons for buyback like achieving capital structure, improving certain financial ratios, etc.

Several studies based on the US, the UK, and European countries found that buyback is the positive information for the market, hence when the announcement is made, a positive significant reaction is observed (Dann, 1981; and Ikenberry, 2000). However, there is a possibility of negative results; this could be the case when the shares are overvalued or when it is done to benefit the executives only or when the buyback is financed through borrowed money. In India, there are only two possible ways through which buyback can be done: through