RESEARCH Anomalous Price VIKALPA

The Journal for Decision Makers

40(4) 435–443

includes research articles Behaviour around © 2015 Indian Institute of

Management, Ahmedabad
SAGE Publications
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DOI: 10.1177/0256090915611773
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analytical and empirical or
case research
Stock Repurchase
Announcements in India
Chanchal Chatterjee and Paromita Dutta

Executive This article examines the impact of open market share repurchase announcements on
stock returns in the Bombay Stock Exchange (BSE). The main objective is to examine
Summary whether share repurchase announcements under the open market route have any
significant impact on the returns of the stocks traded in the BSE. The article covers the
period from 2009 to 2013. For sample selection, two criteria were used: first, the firm
should have been listed in the BSE for at least 28 trading days before the repurchase
announcement date, and second, the firm should have all relevant data required by this
study. A total of 95 repurchase announcements fulfilled these criteria. The analysis period
extended from –28 to +28 trading days relative to the repurchase announcement date
(t = 0). The findings of the study will help us to understand how the market responds
to share repurchase announcements in India and whether a firm actually benefits by
repurchasing its own shares from the market.

This study uses a standard event methodology based on an ordinary least squares
market model with the aim of finding out whether repurchase announcements generate
any abnormal return around the repurchase announcement date. While applying the
market model for estimating the abnormal returns, the regression is estimated based on
the stock return of the firm and market return of the previous 120 trading days. So, here
the estimation window takes into account 120 observations. Using this, the expected
returns are generated and then the abnormal returns are derived for the event window,
28 days prior to the event date and 28 days after the event date.

The findings of the study indicate that share repurchase announcements do not neces-
KEY WORDS sarily generate abnormal stock returns in the Indian equity market unlike developed
economies like the US, Canada, and Australia. The whole sample is further divided
Share Repurchase into various subsamples on the basis of firm size and size of repurchase. The subsample
analyses reveal that smaller firms do not necessarily experience higher abnormal stock
Open Market Repurchase
returns following repurchase announcements than that of the larger firms. The findings
Market Models weakly support the view that larger repurchase size generates greater abnormal stock
returns than the smaller ones.
Stock Returns
Undervaluation

VIKALPA • VOLUME 40 • ISSUE 4 • OCTOBER-DECEMBER 2015 435

S
hare repurchase (hereinafter referred to as repurchase announcements in India and whether a firm
repurchase) by companies first originated in actually benefits by repurchasing its own shares from
the US in the late 1960s, and assumed wide the market. The findings show that share repurchase
popularity by mid-1980s. This corporate practice is announcements by Indian firms in the BSE do not
very much popular in the US, Canada, and the UK. certainly increase their share prices in the market.
The explicit motives behind share repurchases by
The entire sample is further divided into subsamples
firms include returning surplus cash to shareholders,
based on firm size and size of repurchase
increasing promoters’ stake, improving earnings per
announcements. Empirical results show that the smaller
share, reducing takeover threats, and most importantly, firms do not always experience greater abnormal stock
preventing undervaluation of shares in the stock market. returns following share repurchase announcements
India recognized this corporate practice in the financial compared to the larger firms. With regard to the size
year 1998–1999, when Indian companies were allowed of repurchase and stock price reaction, our results
to repurchase their own shares for the first time. In India, find that firms with larger repurchase size experience
firms can repurchase their own shares from the market greater abnormal stock returns than firms with smaller
by following the Open Market Method or they can buy size of share repurchase.
their shares back by using the Tender Offer Method.
However, unlike developed countries like the US or
Canada, the number of repurchase announcements
LITERATURE REVIEW
has been very low in India since its inception. But in Majority of the studies on share repurchases have been
the recent past, an upward rising trend in the share conducted in the developed economies like the US,
repurchase programme has been evident in the Indian Canada, and the UK. Several studies have examined
corporate sector. the underlying motives behind share repurchase
announcement, and the most common motives
Share repurchase is believed to inject some buoyancy emerging out of those studies are returning surplus
into stock prices since the repurchase price is set cash to shareholders, capital structure redesign, anti-
at a level higher than the prevailing market price takeover mechanism, and the application of preferential
and, thus, it is considered as an essential measure to tax rates (Liao et al., 2005). Badrinath and Varaiya
‘rescue a plunging stock market’ (Liao, Ke, & Yu, 2005). (2000), Western and Siu (2002), Financial Executive
Preventing undervaluation of stocks in the market is Internationals (1999), etc., also report similar motives
considered to be one of the most prominent objectives behind share repurchase announcements.
behind share repurchases. Most of the Indian firms
report on their repurchase offer documents that the However, in reality, the principal reason behind share
main objective behind share repurchase is to prevent repurchase is to prevent undervaluation of share
undervaluation of their shares in the market. Through prices in the market. Dann (1981), Vermaelen (1984),
share repurchase, a firm conveys a signal to the market Netter and Mitchell (1989), and Comment and Jarrell
that presently its share is being undervalued in the (1991) find support of the undervaluation hypothesis and
market but the firm expects its share price to increase. observe significant positive abnormal returns around
Does this signalling really work? Some US and repurchase announcement period in the US. Comment
Canadian market based studies document that share and Jarrell (1991) document that during the period of
repurchase announcements reflect positive information announcement, abnormal returns are highest under the
to the market. Dann (1981), Vermaelen (1981), Netter tender offer method of share repurchase and lowest
and Mitchell (1989), and Ikenberry, Lakonishok, and under the open market repurchase method, indicating
Vermaelen (1995, 2000) find a significant positive market that the tender offer method is more informative for the
reaction to the stock repurchases announcements. market. Ikenberry et al. (1995, 2000) and Balachandran
and Troiano (2000) also support the undervaluation
In this backdrop, this study attempts to examine theory. Liao et al. (2005) observe significant negative
whether share repurchase announcements under abnormal returns in most of the days prior to the
the open market route have any significant impact announcement day and significant positive abnormal
on returns of the stocks traded in the Bombay Stock returns on the announcement day and during the
Exchange (BSE). The findings of the study will help first few days of the post-announcement period in the
us to understand how the market responds to share Taiwan Stock Exchange (TWSE).

436 ANOMALOUS PRICE BEHAVIOUR AROUND OPEN MARKET STOCK REPURCHASE ANNOUNCEMENTS IN INDIA
On the other hand, Eberhart and Siddique (2004) find DATA AND METHODOLOGY
lack of consistent evidence of positive stock returns
following repurchase announcements, and opine that In India, firms can repurchase their shares either by
liquidity change is the dominating factor in explaining the tender offer method or through the open market
announcement period’s abnormal stock returns. route. Under the tender offer method, a firm commits
Cook, Krigman, and Leach (2004) also find support to to repurchase a specific number of shares from the
the liquidity hypothesis. Chatterjee and Rakshit (2008) shareholders either at a fixed price or at a price that is
observe that the positive influence of share repurchase arrived at through the book-building process. Under
on stock price is not prevalent in the Indian context in the open market route, firms repurchase their shares
all the repurchase cases as hypothesized theoretically. from the stock market. Here the repurchasing firm does
An analysis of share repurchases during 1999–2003 not commit to buy a specific number of shares and also
in India shows that the actual repurchase price is less there is no commitment on the part of the company
than one half of the maximum price in nearly 50 per regarding the minimum repurchase price. Only the
cent of the cases analysed (Gupta, Jain, & Kumar, 2005). maximum price for repurchase is announced. The
Hertzel (1991) reports that repurchase announcements actual price may vary. The maximum size of repurchase
had little or no effect on the share price of rival firms; the is limited to 25 per cent of the total paid up capital and
information contained in repurchase announcements is reserves of the firm. This study considers only open
primarily company specific. market repurchase programmes.

The regulatory framework around the share The study covered the period from 2009 to 2013.1 For
repurchase activity varies across countries and has sample selection, two criteria were used: first, the firm
significant impact on this activity from different should have been listed in the BSE for at least 28 trading
angles. Repurchase announcement during changes in days before the repurchase announcement date; and
the regulatory framework governing share repurchase second, the firm should have all relevant data required
is linked to positive but statistically insignificant by this study. A total of 95 repurchase programmes
abnormal returns, which is contrary to the evidence fulfilled these criteria. The analysis period extended
of American firms and the researchers are of the view from –28 to +28 trading days relative to the repurchase
that this is possibly because of the overregulated announcement date (t = 0).
share repurchase environment in Australia (Harris
This study covered all the repurchase announcements
& Ramsay, 1995). Rau and Vermaelen (2002)
made through the open market route. The data on
observe that the form and intensity of the share
market return was based on S&P BSE 500, which
repurchase activity in the UK is influenced by the tax
was sourced from the official website of the BSE. The
consequences associated with pension funds. The UK
reason for considering S&P BSE 500 instead of Sensex
firms earn smaller excess returns through repurchase
for computing market return was that most of the
announcements compared to the US firms primarily
repurchasing firms were not part of the Sensex and
because of the regulatory provisions in the UK which
they mostly belonged to the BSE small-cap and the
make it less likely that the firms can disseminate
BSE mid-cap category. The information on repurchase
superior information to repurchase shares under the
announcements were collected from the SEBI website.
situation of undervaluation of stock prices.
The share price data of the sample firms were collected
As pointed out earlier, while several studies have been from the BSE website. Table 1 presents the summary
conducted on share repurchase and its implications on statistics related to the repurchases.
the market as well as on the firms announcing repurchase,
Table 1 shows that 2009 has the highest number (36)
most of the studies have been conducted in developed
of repurchase announcements. The amount of share
nations like the US, the UK, Canada, and Australia. In
repurchase as a percentage of paid-up capital and
India, this area has remained under-researched. There
free reserves ranges between 2.97 per cent and 25 per
is lack of in-depth studies on this corporate activity and
cent over the period of study. The average buyback
its implications for the Indian corporate and the market
size shows a reduction in 2010 (`426.71 million) from
at large. This article is expected to fill up this gap by
the year before (`875.38 million) and then again
contributing to the existing literature with a primary
a substantial increase in the year 2011 (`1,864.72)
focus on the impact of open market stock repurchase
million. Thereafter, a declining trend is evident. In
announcement on stock returns.

VIKALPA • VOLUME 40 • ISSUE 4 • OCTOBER-DECEMBER 2015 437

Table 1: Summary Information of Share Repurchases

Year No. of Repurchase Shares Repurchase as Average Repurchase Size Market Capitalization (` million)
Announcements Percentage of PCFR* Announced (` million)
        Mean Median
2009 36 4.7% to 25% 875.38 26659.07 4582.35
2010 13 4.42% to 25% 426.71 6106.65 1419.20
2011 14 8.34% to 25% 1864.72 68106.84 18187.05
2012 22 2.97% to 25% 1027.00 16061.60 5666.35
2013 10 2.09% to 25% 920.00 21615.92 3484.00
TOTAL 95

Source: SEBI (www.sebi.gov.in) and authors’ computation.

this context, it is worth noting that almost all the From Equation 1, αj and βj are estimated by running
repurchasing firms have disclosed ‘maximizing OLS on the data pertaining to the estimation window.
shareholders value’ as the primary objective behind Thereafter, using these estimates, abnormal returns for
their repurchase announcements. security ‘j’ at time ‘t’ in the event window is computed as:

 
AR=
jt
R jt − α j − β j Rmt (2)

This study used the standard event methodology Finally, average abnormal returns (AARs) and
based on the ordinary least squares (OLS) market cumulative abnormal returns (CARs) were computed
model2 with the aim of finding out whether repurchase based on these abnormal returns.
announcements generated any abnormal return around
the repurchase announcement date. In the market model, the expected return is estimated
by regressing the firm’s stock return on market return.
In a market model, under the assumption that The abnormal return is then derived as the difference
asset returns are jointly multivariate normal and between this expected return and the actual return.
independently and identically distributed through While applying the market model for estimating the
time, the model is correctly specified. This model abnormal returns, the regression is estimated based on
establishes a linear relationship between the market the data of the firm and market return of the previous
return and the individual stock return and that follows 120 trading days. So, here, the estimation window took
from joint normality. into account 120 observations. Using this, the expected
returns were generated and then the abnormal returns
Rjt = αj + βjRmt + εjt  (1) were derived for the event window, 28 days prior to the
event date and 28 days after the event date. Here the
    where E(εjt) = 0 and Var (εjt) = σi2 event date was the announcement date (t = 0). Before
starting the analysis, all the series were tested for
where, stationarity using the Phillips–Peron unit root test. As
expected, both the returns were found to be stationary.
Rjt indicates return on stock j and Rmt implies market
return. The analysis is presented in two ways. First, the
effect of the repurchase announcement around
The equation is estimated using the estimation window the announcement date was measured. To achieve
which is shown as follows: this objective, daily AARs for all stock repurchase
announcements were computed over –28 and +28
A0 + 1 A1 t=0 A2 trading days in response to the announcement date 0.
For each of the days prior to and post announcement,
Here, t = 0 implies the event date (here, the repurchase the hypothesis that return is significantly different from
announcement date); A0 + 1 to A1 is the estimation zero was tested. In addition to that the CARs were also
window and A1 to A2 is the event window. computed over different window ranges. Next, the

438 ANOMALOUS PRICE BEHAVIOUR AROUND OPEN MARKET STOCK REPURCHASE ANNOUNCEMENTS IN INDIA
entire sample was divided into subsamples based on 10 of which, it is statistically significant at 5 per cent level
the size of the firm and the size of repurchase in order to only on day 4. These results do not spell out the existence
examine whether abnormal returns around repurchase of significant abnormal stock returns around repurchase
announcement varied with the firm size and the size of announcements in the BSE. This finding is contrary to
the repurchase. Therefore, the hypothesis that there is the findings of Liao et al. (2005), Comment and Jarrell
difference in abnormal returns between the categories (1991), Ikenberry et al. (1995, 2000), and Balachandran
(firm size and size of repurchase) was also tested. For and Troiano (2000), etc., who observed positive abnormal
firm size, firms were categorized according to their stock return around repurchase announcements.
market capitalization. If market capitalization of the
firm at the time of repurchases announcement fell below
Table 2: Daily Average Abnormal Returns (AARs) Surrounding
`2,000 crore, it was categorized as small-cap. If it was
the Announcement Day
between `2,000 and 10,000 crore, it was called mid-cap;
and if the market capitalization exceeded `10,000 Event days AARs (%) t-value
crore, the firm was classified as large-cap. For size of –10 0.0003 0.093
repurchase, firms were classified as top 25 percentile –9 –0.0003 –0.079
and bottom 25 percentile and also top 50 percentile –8 0.0046 1.242
and bottom 50 percentile firms based on the repurchase –7 0.0087 2.822**
size, defined as the proposed amount to be used for –6 0.0020 0.542
the share repurchase programme as a percentage of –5 0.0089 1.856*
paid up capital and free reserves. Firms could also be –4 0.0038 0.958
categorized into another group based on the announced –3 0.0055 1.665*
motives behind share repurchase announcements. But –2 0.0023 0.611
in the study sample, almost all the firms announced –1 0.0025 0.705
‘maximizing shareholders value’ as the primary motive 0 0.0148 2.56**
behind their repurchase announcements. Hence, such 1 0.0009 0.173
categorization was not followed for this study. 2 –0.0008 –0.215
3 –0.0037 –1.318
4 –0.0070 –2.113**
EMPIRICAL RESULTS 5 0.0013 0.424
6 0.0012 0.368
Abnormal Returns around the 7 –0.0021 0.657
Announcement Date 8 –0.0024 –0.799
This section presents the analysis of how stock returns 9 0.0038 1.165
are influenced by repurchase announcements in three 10 –0.0024 –0.786
time periods—during repurchase announcement Source: Authors’ computation.
date, prior to the announcement date, and post Note. This table presents the abnormal returns surrounding the
announcement date. repurchase announcement day t = 0. The t-statistics test the null
hypothesis that the AARs are equal to zero. * and ** indicate statistical
Tables 2 and 3 present the results of the market model. significance at 10% and 5% levels, respectively.
The daily AARs for all repurchase announcements are
computed over –28 and +28 periods relative to the event The cumulative average abnormal returns (CAARs) for
day 0. In Table 2, only the AARs for the –10 days and share repurchase announcements are presented in Table
+10 days are reported. The results reflect that the AARs 3. Here the CAARs are presented in three different time
in the pre-announcement period (10 days prior to the periods—the top part of the Table reports CAARs around
announcement date) remain predominantly positive, of the repurchase announcement day, the middle part of
which it is found to be statistically significant on day 7 the Table reports CAARs prior to the announcement
at 5 per cent level and on days 5 and 3 at 10 per cent day, and finally, the bottom part of the Table shows
level. The AARs on day 0 (i.e., announcement day) is CAARs on and after the announcement day. The results
also positive and is statistically significant at 5 per cent indicate that firms experience positive CAARs around
level. However, during the post-announcement period, the repurchase announcement day. For event windows
the AARs are found to be negative in most of the days. (–1, +1), (–2, +2), (–3, +3), (–4, +4), (–5, +5), (–10, +10),
For example, AARs are negative on days 2, 3, 4, 7, 8, and (–20, +20), and (–28, +28), the CAARs are positive and

VIKALPA • VOLUME 40 • ISSUE 4 • OCTOBER-DECEMBER 2015 439

all are statistically significant at 5 per cent level, except As reflected in the prior empirical studies, a share
the (–20, +20) window which is significant at 1 per cent repurchase announcement is often described as a
level. These results do not necessarily signify positive mechanism to signal the equity undervaluation. If
impact of share repurchase announcements on stock corporate managers believe that the firm’s share price is
returns, as the CAARs in the pre-announcement periods being undervalued by the market, they use repurchase
are also positive. To illustrate, during the (–5, –1), (–10, announcement to disclose this potentially value-increasing
–1), and (–20, –1) periods, the CAARs are positive and information. Findings in the US market experience poor
all are statistically significant. Table 3 also shows that the pre-announcement performance and, subsequently,
CAARs in the post-announcement period are positive for outperformance after the repurchase announcements,
all the event windows, of which the CAARs pertaining thereby supporting the undervaluation hypothesis.
to (0, +14), (0, +20), and (0, +28) periods are statistically Our finding is contrary to that. This simply signifies
significant. The CAAR during the period (0, +14) is that share repurchase announcements in the BSE do not
significant at 5 per cent level while the CAARs during necessarily support the ‘undervaluation hypothesis’ and
(0, +20) and (0, +28) periods are statistically significant at it is also quite surprising that the objective of ‘maximizing
1 per cent level. Considering all the three time periods— shareholders’ wealth’ is not achieved through share
pre-announcement, around announcement day, and post- repurchase announcements by Indian firms.
announcement—it cannot be argued that the CAARs
have increased significantly in the post-announcement Difference Analysis
period. The CAARs are predominantly positive in all the
three time periods and there is no significant difference The results above have shown that share repurchase
in the values of CAARs (%) in the post-announcement announcements do not necessarily generate abnormal
period compared to the pre-announcement period. stock returns in the Indian equity market. To test the
effects of firm size and the size of repurchase, this study
categorized the entire sample into various subsamples.
Table 3: Cumulative Average Abnormal Returns (CAARs) The findings are presented in the following.
Surrounding the Announcement Day

Windows CAARs (%) t-value Firm Size and Price Response

Combined periods
(–1, +1) 0.0181 2.121** Vermaelen (1981), Ho and Michaely (1988), and Ratner,
(–2, +2) 0.0189 2.381** Szewczyk, and Tsetsekos (1996) document that the stock
(–3, +3) 0.0221 2.505** price reaction of large firms is less positive than that of
(–4, + 4) 0.0197 1.926** small firms around share repurchase announcements.
(–5, +5) 0.0287 3.21** On the other side, Barry and Brown (1984) observe that
(–10, +10) 0.0463 3.059** the mass media tend to provide less news coverage of
(–20, +20) 0.0841 3.903*** small firms than large ones, which ultimately leads the
(–28, +28) 0.0847 3.249** large firms’ prices to be more information-efficient. Here,
Prior to the announcement day sample firms were categorized on the basis of their market
(–5, –1) 0.0241 2.495** capitalization, defined as the firm’s share price in the
(–10, –1) 0.0423 3.847*** market multiplied by the number of shares outstanding
(–20, –1) 0.0528 3.679*** at the time of share repurchase announcement. As per
On and after the announcement day the size of market capitalization described earlier, there
(0, +3) 0.0108 1.269 were 75 firms under the small-cap category and 14
(0, +5) 0.0046 0.62 firms under the mid-cap category. Only six firms were
(0, +10) 0.0040 0.342 classified as large-cap; hence, they were ignored.
(0, +14) 0.0194 1.769**
(0, +20) 0.0313 2.671*** Panel I of Table 4 shows that the CAARs of the mid-cap
(0,+28) 0.0259 2.005** group are negative but statistically insignificant during
the (–20, –1) window, while the small-cap group
Source: Authors’ computation.
registers statistically significant (at 1 per cent level)
Note. This table presents the CAARs surrounding the repurchase positive CAARs during the same window. The means
announcement day t = 0. The t-statistics test the null hypothesis that
test shows a statistically significant mean difference at
the CAARs are equal to zero. ** and *** indicate statistical significance
10 per cent level. So, in the pre-announcement period,
at 5% and 1% levels, respectively.

440 ANOMALOUS PRICE BEHAVIOUR AROUND OPEN MARKET STOCK REPURCHASE ANNOUNCEMENTS IN INDIA
the small-cap group has registered higher CAARs between abnormal stock return and size of repurchase.
compared to the mid-cap group. However, during In this subsample analysis, firms are partitioned by
the (0, +20) period, the mid-cap group experiences the size of repurchase. As noted earlier, in India, the
higher CAARs (0.071 %) compared to the small-cap maximum permissible size of repurchase is 25 per cent.
group (0.024 %) and both are significant at 10 per cent Firms are ranked from the largest to the smallest on
level, but the difference in the CAARs is statistically the basis of the size of repurchase. Then the sample is
insignificant (t = 1.336). During the (–28, +28) window, partitioned into the following two groups: the top and
the difference in the CAARs between the two groups are the bottom 25 percentile and the top and the bottom
not statistically significant. During this event window, 50 percentile of the size of repurchase. The statistical
both the mid-cap group as well as the small-cap group significance and magnitude of the stock returns for the
experience positive CAARs, of which the CAARs of the top groups are compared with the bottom groups. The
small-cap group (0.087 %) are statistically significant at subsample tests by repurchase size measure the impact
5 per cent level. Therefore, the means tests reveal that of repurchase size on abnormal stock returns. Panel II
the difference in the CAARs between the small-cap and of Table 4 presents the empirical results.
the mid-cap group is statistically significant only in the
pre-announcement period (–20, –1) but not in the post- The results show an insignificant difference in the
announcement period (0, +20) and the entire period means between the top and bottom 25 percentiles (t
(–28, +28). Thus, the empirical findings report a mixed = –0.544) during the (–20, –1) window. The top and
result with regard to the stock returns and firm size. The the bottom 50 percentile comparison also reports
views of Vermaelen (1981), Ratner et al. (1996), and Liao insignificant difference in the means between the large
et al. (2005) that larger firms experience less positive and the small repurchasing firms (in terms of size of
stock return to share repurchase announcements repurchase) during the same event window. In the
compared to small firms is not necessarily applicable in pre-announcement period (–20, –1), the bottom 25 and
the Indian equity market. the bottom 50 percentile firms have experienced larger

Table 4: Cumulative Average Abnormal Returns (CAARs) around Share Repurchase Announcements (difference analysis)

(–20, –1) (0, +20) (–28, + 28)

Subsample
CAARs t-value CAARs t-value CAARs t-value
Panel I: Firm Size  
Mid-cap –0.006 –0.135 0.071 2.050* 0.095 1.709
Small-cap 0.073 3.792*** 0.024 1.677* 0.087 2.835**
Difference a –0.078 –1.669* 0.047 1.336 0.009 0.121
Panel II: Buyback Size 
Top 25 percentile 0.016 0.574 0.058 2.672** 0.084 1.680
Bottom 25 percentile 0.040 1.144 –0.007 –0.307 0.024 0.467
Difference* –0.024 –0.544 0.066 2.023** 0.059 0.825
 
Top 50 percentile 0.036 1.397 0.041 2.476** 0.084 2.211**
Bottom 50 percentile 0.060 2.707* 0.012 0.646 0.073 2.132**
Difference a –0.024 –1.043 0.029 0.815 0.010 –0.040
Source: Authors’ computation.
Note. This table presents the CAARs in the (–20, –1), (0, +20), and (–28, +28) windows. The t-statistics test the null hypothesis that the CAARs
are equal to zero. *, **, and *** indicate statistical significance at 10%, 5%, and 1% level, respectively. ‘a’ means a two-tailed test.

Size of Repurchase and Stock Price Response CAARs compared to their top 25 and top 50 percentile
groups, respectively, of which only CAARs of the
The size of repurchase is often used as a proxy for bottom 50 percentile group is statistically significant
information, in which large repurchasing conveys more at 10 per cent level. The results in the window (0, +20)
information regarding the cash flow position of the demonstrate that a larger size repurchase tends to have
firm (Liao et al., 2005). Davidson and Garrison (1989) higher abnormal returns. To illustrate, the CAARs in
and Ratner et al. (1996) observe a positive association the top 25 percentile (0.058 %) group is significantly

VIKALPA • VOLUME 40 • ISSUE 4 • OCTOBER-DECEMBER 2015 441

larger than that in the bottom 25 percentile group not hold good in the Indian equity market implying
which reports negative CAARs of –0.007 per cent, that through share repurchases Indian firms are not
but is statistically insignificant. Here the means test able to enhance their share prices in the market. While
shows statistically significant mean difference at 5 analysing whether stock return following repurchase
per cent level. For the window (0, +20), the outcome announcements varies across firm size, a mixed result
is almost identical in the case of top 50 and bottom 50 is evident. The difference in the CAARs between the
percentile analyses but the difference in the means test small-cap and mid-cap group is statistically significant
does not appear to be significant. The findings in the only in the pre-announcement period (–20, –1) and
(–28, +28) window also show that a larger repurchase not afterwards. The results do not necessarily support
tends to yield higher abnormal returns. However, in the view that the stock price reaction to repurchase
this window, the CAARs are statistically insignificant announcements of the larger firms is less positive
for top 25 and bottom 25 percentile comparisons, while than that of the smaller firms and, finally, the findings
these are significant at 1 per cent level for the top 50 weakly support the view that larger repurchase size
and bottom 50 percentile analyses. In both the cases, generates greater abnormal returns than smaller firms.
the differences in the means test are not statistically
significant. Overall, the evidence weakly supports The holistic result indicates that share repurchase
the view that larger repurchase size generates greater announcements in India do not carry much
abnormal returns than the smaller ones, which is partly information to the investors, and Indian firms are
consistent with the findings of Davidson and Garrison not able to ‘maximize shareholders’ wealth’ through
(1989) and Ratner et al. (1996). this corporate activity. The possible reason behind
this could be the nature of the ownership structure
of the Indian firms, which is distinctively different
from those in the US. Indian firms are mostly owned
CONCLUSION
or otherwise controlled by the founding members
The present study uses event methodology to (termed as promoters) unlike the widespread equity
empirically examine the impact of open market ownership model in the US. Indian firms may go
share repurchases on stock returns in the BSE. The for share repurchase announcements to counter the
findings of the study indicate that share repurchase takeover threats or to enhance promoters’ stake in the
announcements do not necessarily generate abnormal business. The regulatory norms surrounding share
stock returns for the repurchasing firms in the Indian repurchase have also material impact on this corporate
equity market unlike the developed economies like the practice and vary across nations. These areas need to
US. The results derived from the analyses of AARs and be investigated further for better understanding of this
CAARs show that the undervaluation hypothesis does corporate activity.

NOTES
1 The financial year in India is from 1 April to 31 March of 2 For details on the market model, refer to Campbell, Lo,
the following year. Thus, the financial year 2009 covers the and MacKinlay (1997).
period from 1 April 2008 to 31 March 2009.

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Chanchal Chatterjee is currently working as an Assistant Paromita Dutta is currently working as an Assistant Professor
Professor in the Finance Area at the International Management of Accounting and Finance at St. Xavier’s College, Kolkata,
Institute, Kolkata, India. A gold medalist in the Masters, he has India. She is pursuing her doctoral research in the area of
received many prestigious awards for academic excellence. financial economics from the University of Calcutta, India.
He has a Ph.D in Financial Restructuring, for which he She has published several research papers in reputed refereed
obtained the best research award in the Finance Track in journals. Her areas of research interest include corporate
the 3rd Doctoral Colloquium from IIM Ahmedabad in 2010. finance and banking.
His doctoral dissertation has been published in the form
of a book by an international publisher based in Germany. e-mail: [email protected]
He has published more than 20 research papers in refereed
journals and has presented papers in several international
conferences. His research interest includes corporate finance,
corporate governance, and corporate payout policy.

e-mail: [email protected]

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