Market overreaction to poor long-run performance? a case of repurchase firms in India

Abstract

We find significant positive abnormal returns around the announcement of both tender and open market repurchases in India. This suggests that the equity markets in India regard repurchase announcements as positive information signals. We examine whether such abnormal returns are justified by the operating performance of firms during the post repurchase period. We find that firms which announce open market repurchases underperform their peers on several measures of operating performance. We infer from these results that the market overreacts to open market repurchase announcements. Moreover, most open market repurchases are preceded by sharp price declines, suggesting that these are more frequently used for price support than for signalling undervaluation. The tender repurchase firms, on the other hand, do not exhibit any significant decline in their operating performance in the long run.