Academic journal article IUP Journal of Applied Finance

Managements' View on Shares Repurchase: An Indian Survey

Academic journal article IUP Journal of Applied Finance

Managements' View on Shares Repurchase: An Indian Survey

Article excerpt

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Introduction

The empirical evidences in literature demonstrate that shares repurchase have significant announcement effects and facilitate maximizing the wealth of the shareholders. In a majority of studies reviewed, a strong support for undervaluation and signaling hypotheses has been reported implying the firm's future promise to disburse free cash and positive future earnings prospects.

Apart from the instant market reaction, it is necessary to understand the fundamental and the psychological factors behind the shares repurchase announcements. These decisions are amongst the major financial decisions taken by the firm, as the top level finance personnel (Directors/Vice President/Company Secretary/Managers) are directly involved in taking these decisions. The Indian stock market is still beset with information asymmetry existing between the managers and the shareholders. Hence, it becomes useful to understand the driving forces behind and the motivations/perceptions of the management announcing these decisions.

The objective of the paper is to gauge/understand the viewpoint of the Indian finance managers in respect of the announcement of shares repurchase using a survey approach. The viewpoints of the respondent companies have been centered on two major aspects: (i) the three most important motives in relation to shares repurchase; and (ii) general views of the finance managers on issues involving shares repurchase.

Literature Review

Researchers (across the globe) have surveyed the corporate managers to identify the reasons and the motives for shares repurchase. Amongst these, the dominant explanations/motives are the signaling, undervaluation and the free cash flow hypotheses related to shares repurchase. The following section delineates the findings of the surveys conducted.

One of the earliest surveys of CFOs by Baker et al. (1981) documented that the shares repurchase were good investment of excess cash. Further, Wansley et al. (1989) provided evidence of managerial attitudes towards shares repurchase. The survey findings supported that shares repurchase signaled confidence in the firm, which the management believed was not incorporated in the current stock price. The results were consistent with the informational signaling hypothesis of shares repurchase.

However, survey results by Tsetsekos et al. (2011) supported that the desire to change the firm's capital structure was the frequently expressed motivation behind shares repurchase. The majority of the responses were consistent with the signaling hypothesis. Similar results were supported by Cudd et al. (1996) where only a partial support for the signaling hypothesis was observed. Likewise, information signaling and optimum capital structure were the major motivations for shares repurchase as reported by Dharmawan et al. (1997). Improving the financial performance (earnings per share) and financial position (net assets backing per share) followed by signaling were the motivations for financial managers as reported by Mitchell et al. (2001). The study by Liano et al. (2003) reported that the most commonly cited motivation by CFOs for repurchasing shares was to add value for the shareholders.

The survey by Baker et al. (2003) reported the signaling hypothesis, adjustment of the firm's capital structure and avoidance of dividend taxation as the main reasons for the firms undertaking shares repurchase. The excess temporary cash flows with firms have been observed in the survey results by Block (2006). Achieving an optimal capital structure was reported as the prime motive in a survey by Dixon et al. (2008). The survey evidences by Cesari et al. (2011) have supported that liquidity enhancement and price stabilization are the two motives for the shares repurchase. Peng and Isa (2015) have reported that the main reason for the companies to engage in shares repurchase is to protect their share prices from the market undervaluation. …

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