A minimum buyback requirement in open market repurchases: impact on the signalling role

Abstract

The paper investigates the impact of the imposition of a minimum buyback requirement on open market repurchases in India. We find that the regulatory change has led to a significant increase in the abnormal stock returns earned by buyback firms on announcement. In complementary findings, we observe a significant improvement in the long-run operating performance of the announcers in the post-regulatory reform period. We also find that the extent of market timing in buyback execution is lower with the mandate of a minimum buyback. These findings suggest that the regulation has strengthened the signalling role of open market buybacks. Furthermore, implying a significant decline in the option value associated with open market buybacks after the regulatory change, we also document an increase in the propensity of firms with lower stock liquidity and higher institutional holdings to buyback through fixed price tenders. Our findings suggest that the regulatory change has lowered the “cheap-talk” motives associated with the announcement of open market buybacks.