Open Market Repurchases and Signaling Hypothesis

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.