TITLE:
Open Market Repurchases and Signaling Hypothesis
AUTHORS:
Vandana Gupta
KEYWORDS:
Buyback, Signaling, Event Study, Abnormal
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.3,
February
23,
2018
ABSTRACT: This paper analyzes the impact of open market
repurchase (OMR) route of buyback on the stock prices of a data set of 30
Indian listed firms which had gone for buyback in the FY16. The author has
applied event study methodology to calculate abnormal returns and cumulative
abnormal returns on stocks using BSE 500 as market index. The returns are
calculated for 20 days prior and post buyback announcement to test for
information signaling hypothesis. The
analysis shows that average abnormal return (AAR) on the date of announcement
is -0.23 percent
while cumulative abnormal return (CAR) is about 5.72 percent on the
announcement date with an overall CAR 3.44 percent for 40-day event window. The research findings reveal
that unlike tender offers, OMR does not lead to a signaling effect as there is the
insignificant impact on stock prices. Market reaction to buyback offer is in
contradiction to signaling hypothesis predictions. The results of the study
imply that the information related to the announcement of the buyback is
already reflected in the share price. This also throws light on the growing
maturity and efficiency of the stock market of India. Analyzing the signaling
effect through OMR reveals that rather than signaling hypothesis, market
reaction to buybacks is better explained by free cash flow hypothesis.