Trading strategy using share buybacks: evidence from India

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The efficient market hypothesis states that in the efficient markets, participants cannot make extra-normal returns by exploiting any publicly available information. However, traders are constantly looking to exploit publicly available information to generate abnormal returns for themselves and their clients. One such event is share buyback announcement, which traders can utilize to create profitable trading strategies. The authors undertake the present study to examine if share buyback announcements provide profitable trading strategies to traders. Event study methodology has been adopted to analyze buyback announcements by Indian companies from January 2012 to December 2018. Forty-one (41) day window period comprising of 20 days pre-event, an announcement day, and 20 days post-event period is created to analyze the risk-adjusted average abnormal returns. The empirical findings suggest that there are negligible trading opportunities available for investors post announcements. However, significant risk-adjusted returns are found in the pre-event window, indicating that if investors can predict buyback announcements, they may earn extra-normal returns. The study confirms that Indian stock markets are in the semi-strong form of efficiency. The study also provides a profitable trading strategy for investors in the pre-event window. Finally, it also draws the regulators’ attention to see if insider trading could be the reason for abnormal returns in the pre-event window. The authors conclude the results by confirming that Indian markets are semi-strong in market efficiency and by indicating regulatory interventions to control insider trading.

Acknowledgement
The infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.

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  • JEL Classification (Paper profile tab)
    G14, G12, G35
  • References
    42
  • Tables
    4
  • Figures
    11
    • Figure 1. Event study timeline (in days)
    • Figure 2. Average abnormal returns for 41 days
    • Figure 3. Cumulative average abnormal returns for 41 days
    • Figure 4. Average abnormal returns for the period of (–20, –1) days
    • Figure 5. Average abnormal returns for the period of (–15, –1) days
    • Figure 6. Average abnormal returns for the period of (–5, –1) days
    • Figure 7. Average abnormal returns for the period of (–3, –1) days
    • Figure 8. Average abnormal returns for the period of (–1, 0) days
    • Figure 9. Average abnormal returns for the period of (–1,+1) days
    • Figure 10. Average abnormal returns for the period of (+2, +5) days
    • Figure 11. Average abnormal returns for the period of (+2, +10) days
    • Table 1. Number of buybacks each year
    • Table 2. Average abnormal returns (AAR) statistics
    • Table 3. Year-wise analysis of AAR results
    • Table 4. CAAR for buyback announcements
    • Conceptualization
      Asheesh Pandey
    • Formal Analysis
      Asheesh Pandey, Vandana Bhama
    • Funding acquisition
      Asheesh Pandey, Vandana Bhama, Amiya Kumar Mohapatra
    • Investigation
      Asheesh Pandey, Amiya Kumar Mohapatra
    • Methodology
      Asheesh Pandey, Amiya Kumar Mohapatra
    • Project administration
      Asheesh Pandey
    • Resources
      Asheesh Pandey, Vandana Bhama
    • Supervision
      Asheesh Pandey
    • Validation
      Asheesh Pandey, Amiya Kumar Mohapatra
    • Visualization
      Asheesh Pandey, Vandana Bhama
    • Writing – review & editing
      Asheesh Pandey
    • Software
      Vandana Bhama, Amiya Kumar Mohapatra
    • Writing – original draft
      Vandana Bhama, Amiya Kumar Mohapatra