Do Permanent and Temporary Cash Flows Affect Corporate Buybacks?

   Equity buyback decisions are critical commitments, depending on the cash position of a firm.

   The purpose of this study was to examine the effects of cash flow volatility on the buyback decisions of Indian corporate firms.

   The sample comprised 132 Indian companies listed on the Bombay Stock Exchange from 2012–2019. The selected firms had non-significant abnormal returns (after buyback announcements) that aroused the inquisitiveness to explore the real motivation behind repurchases across firms with permanent and volatile cash flows. The results of ordinary least squares regression suggested that large cash holdings were unrelated to the buybacks with coefficient values –0.02 and 0.01 for firms with permanent and volatile operating cash flows, respectively. Firms with considerable cash flows exhibited a low tendency to buy back their shares. The repurchases served mostly as signaling tools meant to enhance the value of stocks that were potentially undervalued. Thus, the undervaluation of stocks (with a beta of –0.38) seemed to have significantly affected the repurchase decision in association with the constant or volatile cash flows of the firms. Further, small firms appeared to engage more frequently in buybacks given their lower market-to-book ratios.

1. Bagwell L. S., Shoven J. B. Cash distributions to shareholders. Journal of Economic Perspective. 1989;3(3):129–140. DOI: 10.1257/jep.3.3.129

2. Grullon G., Michaely R. The information content of share repurchase programs. The Journal of Finance. 2004;59(2):651–680. DOI: 10.1111/j.1540–6261.2004.00645.x

3. Chan K., Ikenberry D., Lee I. Economic sources of gain in stock repurchases. Journal of Financial and Quantitative Analysis. 2004;39(3):461–479. DOI: 10.1017/S0022109000003987

4. Yook K. C., Gangopadhyay P. Free cash flow and the wealth effects of stock repurchase announcements. Quarterly Journal of Finance and Accounting. 2010;49(3–4):23–42. DOI: 10.2307/23074628

5. Chatterjee C., Mukherjee P. Price behaviour around share buyback in the Indian equity market. Global Business Review. 2015;16(3):425–438. DOI: 10.1177/0972150915569931

6. Gupta V. Open market repurchases and signaling hypothesis. Theoretical Economics Letters. 2018;8(3):592–608. DOI: 10.4236/tel.2018.83041

7. Gupta S., Kalra N., Bagga R. Do buybacks still hold their signaling strength? An empirical evidence from Indian capital market. Amity Business Review. 2014;15(1):2–18. URL: https://www.amity.edu/abs/abr/pdf/Vol%2015%20No.1/1.pdf

8. Rajlaxmi. Share buybacks: An analytical study of announcement effect on stock prices in India. Indian Journal of Applied Research. 2013;3(2):241–243. URL: https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/fileview/February_2013_1359813286_55158_82.pdf

9. Chavali K., Shemeem S. Impact of buybacks on share price performance of companies in Indian context. European Journal of Finance and Banking Research. 2011;4(4):23–33.

10. Thirumalvalavan P., Kumaran S. Share price behaviour around buyback and dividend announcements in India. SSRN Electronic Journal. 2006. DOI: 10.2139/ssrn.873986

11. Mishra A. An empirical analysis of share buybacks in India. The ICFAI Journal of Applied Finance. 2005;11(5):5–24. URL: https://core.ac.uk/download/pdf/9315762.pdf

12. Bhama V. Understanding equity repurchase motives for different firm set-up: Indian evidence. Investment Management and Financial Innovations. 2021;18(1):90–100. DOI: 10.21511/imfi.18(1).2021.08

13. Jena S. K., Mishra C. S., Rajib P. Determinants of the choice of share buyback methods: A study in India. Cogent Economics & Finance. 2020;8(1):1782073. DOI: 10.1080/23322039.2020.1782073

14. Jena S.K, Mishra C. S., Rajib P. Factors influencing share buyback decisions of Indian companies. SSRN Electronic Journal. 2016. DOI: 10.2139/ssrn.2886739

15. Dittmar A. K. Why do firms repurchase stock? The Journal of Business. 2000;73(3):331–355. DOI: 10.1086/209646

16. Jagannathan M., Stephens C. P., Weisbach M. S. Financial flexibility and the choice between dividends and stock repurchases. Journal of Financial Economics. 2000;57(3):355–384. DOI: 10.1016/S0304–405X(00)00061–1

17. Andriosopoulos D., Hoque H. The determinants of share repurchases in Europe. International Review of Financial Analysis. 2013;27:65–76. DOI: 10.1016/j.irfa.2012.12.003

18. Varma U., Singh H., Munjal A. Corporate restructuring through share buybacks: An Indian experience. Australian Accounting, Business and Finance Journal. 2018;12(2):117–133. DOI: 10.14453/aabfj.v12i2.8

19. Jagannathan M., Stephens C. P. Motives for multiple open-market repurchase programs. Financial Management. 2003;32(2):71–91. DOI: 10.2307/3666337

20. Rajagopalan N. V.R., Shankar H. Stock market behaviour around buyback announcements in India: An empirical justification for preferring the open market repurchase mode. Indian Journal of Finance. 2012;6(12):43–52. DOI: 10.17010/ijf/2012/v6i12/72364

21. Bartov E. Open-market stock repurchases as signals for earnings and risk changes. Journal of Accounting and Economics. 1991;14(3):275–294. DOI: 10.1016/0165–4101(91)90015-G

22. Ishwar P. Stock price responses to the announcement of buyback of shares in India. Indian Journal of Commerce and Management Studies. 2010;1(1):14–29. URL: https://scholarshub.net/ijcms/index.php/ijcms/article/view/16/10

23. Lee B. S., Suh J. Cash holdings and share repurchases: International evidence. Journal of Corporate Finance. 2011;17(5):1306–1329. DOI: 10.1016/j.jcorpfin.2011.06.006

24. Vafeas N., Joy O. M. Open market share repurchases and the free cash flow hypothesis. Economic Letters. 1995;48(3–4):405–410. DOI: 10.1016/0165–1765(94)00631-B

25. Ikenberry D., Lakonishok J., Vermaelen T. Market underreaction to open market repurchases. Journal of Financial Economics. 1995;39(2–3):181–208. DOI: 10.1016/0304–405X(95)00826-Z

26. Vafeas N. Determinants of choice between alternative share repurchase methods. Journal of Accounting, Auditing & Finance. 1997;12(2):101–124. DOI: 10.1177%2F0148558X9701200201

27. Drousia A., Episcopos A., Leledakis G. N. Market reaction to actual daily share repurchases in Greece. The Quarterly Review of Economics and Finance. 2019;74:267–277. DOI: 10.1016/j.qref.2019.01.007

28. Opler T., Pinkowitz L., Stulz R., Williamson R. The determinants and implications of corporate cash holdings. Journal of Financial Economics. 1999;52(1):3–46. DOI: 10.1016/S0304–405X(99)00003–3

29. Evans J. P., Evans R. T., Gentry, J. A. The decision to repurchase shares: A cash flow story. Journal of Business and Management. 2003;9(2):99–123. URL: https://jbm.johogo.com/pdf/volume/0902/0902–99–123.pdf

30. Chee C.-M., Razak N. H. bin A., Noordin B. A. bin A. Do share repurchases distort stock prices? Evidence from the Unites States and Malaysia. Studies in Microeconomics. 2022;10(2):131–154. doi: 10.1177/23210222211024380

31. Hovakimian A. The role of target leverage in security issues and repurchases. The Journal of Business. 2004;77(4):1041–1072. DOI: 10.1086/422442

32. Barclay M. J., Smith C. W., Jr. Corporate payout policy: Cash dividends versus open-market repurchases. Journal of Financial Economics. 1988;22(1):61–82. DOI: 10.1016/0304–405X(88)90022–0

33. Bens D. A., Nagar V., Skinner D. J., Wong M. H. F. Employee stock options, EPS dilution, and stock repurchases. Journal of Accounting and Economics. 2003;36(1–3):51–90. DOI: 10.1016/j.jacceco.2003.10.006

34. Mitchell J. D., Dharmawan G. V., Clarke A. W. Managements’ views on share buy-backs: An Australian survey. Accounting & Finance. 2001;41(1–2):93–129. DOI: 10.1111/1467–629X.00055

35. Li K., McNally W. The information content of Canadian open market repurchase announcements. Managerial Finance. 2007;33(1):65–80. DOI: 10.1108/03074350710715818

36. Brockman P., Howe J. S., Mortal S. Stock market liquidity and the decision to repurchase. Journal of Corporate Finance. 2008;14(4):446–459. DOI: 10.1016/j.jcorpfin.2008.06.001

37. Ginglinger E., Hamon J. Actual share repurchases, timing and liquidity. Journal of Banking & Finance. 2007;31(3):915–938. DOI: 10.1016/j.jbankfin.2006.07.006

38. Dixon R., Palmer G., Stradling B., Woodhead A. An empirical survey of the motivation for share repurchases in the UK. Managerial Finance. 2008;34(12):886–906. DOI: 10.1108/03074350810915833

39. Bonaimé A. A., Öztekin Ö., Warr R. S. Capital structure, equity mispricing and stock repurchases. Journal of Corporate Finance. 2014;26:182–200. DOI: 10.1016/j.jcorpfin.2014.03.007

40. Aramonte S. Mind the buybacks, beware of leverage. BIS Quarterly Review. 2020;(Sept.):49–59. URL: https://www.bis.org/publ/qtrpdf/r_qt2009d.pdf

41. Vermaelen T. Common stock repurchase and market signaling. Journal of Financial Economics. 1981;9(2):139–183. DOI: 10.1016/0304405X(81)90011–8

42. Liang W.-L., Chan K., Lai W.-H., Wang Y. Motivation for repurchases: A life cycle explanation. Journal of Financial Services Research. 2013;43(2):221–242. DOI: 10.1007/s10693–011–0126–7