Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
A Comparision between Announcement Effects of
Dividends and Share Buybacks on Share Price Returns:
Selected Indian Companies
Janki Mistry
The traditional way of sharing the profits of the company with its Shareholders is
dividends. Dividends have been viewed as a very important factor for decision
making as far as investment in shares of a particular company is concerned. It has
been found in many studies that the information effect around the time of dividend
payments has been observed to increase the returns on shares around this time.
Share Buybacks are also a form of distributing the extra cash of the company.
Buybacks are actually a type of dividends where the company is also able to
expropriate control from the existing shareholders thereby increasing the value for the
remaining shareholders.
This study encompasses a comparision between Dividends and Share Buybacks and
the impact that these actions have on the performance of the company’s shares in
the stock market during the announcement period. This event study includes only
Indian companies which are listed on the Indian Stock Exchanges such as the NSE
and the BSE. The data has been taken from the Securities and Exchange Board of
India website, Bombay Stock Exchange, Capitaline Database of Indian Companies
and Prowess Database of CMIE (Centre for Monitoring Indian Economy).
JEL Codes: G35, G350
1. Introduction:
Dividends are a popular benchmark for gauging the performance of the company.
Most shareholders, especially retail shareholders have a preference for dividend
payments as per the theories given by James E. Walter and Myron Gordon. Both
have propounded that when the firm is a growing one i.e. r > k, the value of the firm
will increase with increase in dividends. This trend has been observed in the returns
of those companies which declare a dividend. Hence, dividend announcements
usually lead to an increase in the stock prices of the dividend declaring companies
around the time of announcements. However, one problem with dividends is that
they attract income tax. So those individuals which are in the high tax brackets would
end up paying a good amount of tax on income from dividends which would typically
be added to their main income. Companies also have to pay a dividend distribution
tax on dividend payments. In India, this tax has been increased from 15 percent to
17.65 percent in the Union Budget for the financial year 2014-15. This has come as
a huge disincentive for companies as well as shareholders.
Hence, in the recent few years, companies have started resorting to share buybacks
in order to distribute excess cash to the equity shareholders. As against dividends,
buybacks attract capital gain tax. In India, shares and mutual funds are exempt from
long term capital gain tax under Section 10(38) of the Income Tax Act of India
(Shares/mutual funds held for a period of more than 12 months). The short term
___________________________________________________________
Assistant Professor, Department of Business and Industrial Management, G.H. Bhakta Management
Academy, Veer Narmad South Gujarat University.
Udhana Magdalla Canal Road, Opposite G.D. Goenka School, Surat-305007, Gujarat, India,
Email: janki.mistry@gmail.com
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
capital gain tax on shares/ mutual funds is 15 percent. Hence, companies have
started resorting to buybacks in a large way. Share buybacks are done in two ways
(a) Cash Tender Offers, (b) Open market Repurchases i. In this paper, only open
market repurchases have been considered for the analysis as cash tender offers are
less frequent and the magnitude of cash tender offers is very large as compared to
Open Market Repurchases. Companies reduce their equity capital through share
buybacks thereby reducing the number of equity shares floating in the market. The
amount of equity decreases but the amount of debt remains the same; hence
leverage increases. Due to this increased impact of leverage, it is theoretically
believed that share repurchases lead to increase in valuation of companies. Another
theory is that share repurchases send out positive signals to the investors indicating
the financial strength of the company declaring the buyback. It indicates that the
company is financially so strong and cash rich that it can even dispense with its
equity which by nature is a permanent source of capital for the company. This gives
an indication to the market that the operating performance of the company is very
good. However, shareholders’ reaction to share buybacks has not been too
overwhelming in India. There could be several reasons for this: (i) General lack of
awareness among shareholders about the tax benefits of Share buybacks vis-à-vis
dividends. (ii) Intent of Companies- Usually companies use buybacks to signal
positive operational performance even though in reality the performance has not
improved. Sometimes, companies’ fixation with increasing buyback programmes
affects its investment decisions and long term growth prospects. This paper strives
to examine the difference in market reactions to dividend announcements and share
buyback announcements. Since announcement effects are more pronounced during
the first few days after the announcement, a five day window has been chosen to
understand the impact of the announcements on stock prices.
2. Review of Literature:
Dividends have been an important method of distributing cash by the companies.
However, over the last few years, dividends are losing out as the most preferred
method of profit sharing. Instead share repurchases and buybacks have increased in
the past few years and now form a major component of payout. Factors which have
lead to the increasing popularity of share repurchases in the USA are changing
economic conditions, improved government regulations and flexibility of repurchases
vis-à-vis dividends(Robert A. Weigand and H. Kent Baker, 2009).
In their study, comparing SDDs (Specially Designated Dividends) and tender offer
common stock repurchases, (Chhachhi and Davidson, 1997)found that both the
events elicited positive stock returns, however the return on stocks for tender offer
common stock repurchases was greater than SDD returns.
In optimizing the use of excess cash, companies after achieving their desired capital
structure and exploring possible gainful investment opportunities should focus on
payout decisions. Management should try to pay a level of dividends which reflect
the strength and stability of their expected earnings stream and also satisfies the
expectations of its shareholders. In doing so, companies such as IBM, Apple and
Microsoft have resorted to share buybacks as a measure of distributing
dividends(Abuaf, 2012).
Another paper written by Hsieh & Wang, 2008 explores how share repurchases are
gaining popularity over traditional dividend payouts because of the differential tax
treatments between dividends and repurchases. It was found that since insiders
were the major decision makers for the choice of payout policy and as insiders were
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
exposed to high rate of dividend tax, they preferred share repurchases. After
controlling for variables such as size of the firm, regularity of cash flows, investment
and expansion opportunities, institutional ownership and ESOPs, it was found that
firms with higher insider holding prefer share repurchases to cash dividends. This
paper explored the tax aspect and its impact on gains from share repurchases.
Liljeblom & Pasternack conducted a study of Finnish firms and found that share
repurchases were more frequently observed in firms where foreign ownership was
more. Evidence supporting both signaling and agency cost avoidance hypotheses for
cash distributions was found especially in share repurchases.
Indian corporate firms became bolder and more versatile in their approach to capital
restructuring post 1991 after the liberalization, privatization and globalization agenda
was initiated by the then Finance Minister, Dr. Manmohan Singh. After the initial
adjustments to changing economic environment, Indian companies have started
thinking globally and have adopted sophisticated financial practices one of which is
cash distribution through share repurchases. Few such studies drawing a
comparision between repurchases and dividends have been conducted on Indian
firms. This study has been initiated to understand the Indian stock markets’ reactions
to repurchases vis-à-vis dividends.
3. Research Methodology:
Objective of the study: To examine if there is any difference between stock market
returns around announcement of dividends and announcement of repurchases.
The research hypothesis is as follows:
H0: There is no difference between the stock price returns of Share Repurchases
and Dividends.
H1: There is a difference between the stock price returns of Share Repurchases and
Dividends.
Data: The data for share repurchases has been collected from the Securities and
Exchange Board of India website and share price data was collected from the
Bombay Stock Exchange Website.
The data for dividends was collected from the CAPITALINE Database of Indian
Companies.
Sample: All listed companies of the BSE 100 Index which issued dividends in the
financial year 2014 -15 have been included in the study.
All listed companies of the BSE which went for a share repurchase through open
offer in the financial year 2013-14 and 2014-15 have been included in the study.ii
The sample size for buybacks is 30 instances of share buybacks by companies
during the financial year 2013-2015 and the sample size for dividends is 137
instances of dividend payments during the financial year 2014-15.
To examine the announcement effect for returns through dividends and share
repurchases individually, paired samples T-Test has been used.
In order to analyse the differences in the returns due to dividend and repurchase
announcements, independent samples T-Test has been used. The data has been
checked and corrected for normality.
Further Scope for the study: This study can be extrapolated to include more samples
across more number of years. At the moment cross sectional data has been used
but time series data analysis could give more comprehensive empirical evidence
about stock price behavior. The data can be controlled for various other extraneous
variables which affect stock price behaviour, besides the announcement effects.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
4. Analysis and Interpretation:
Returns have been calculated using the formula R=(P1-P0)/P0. Average abnormal
returns were calculated by using excess return over market return method. After that
returns were cumulated and hence Cumulated Average Abnormal Returns were
obtained for pre and post announcement time periods. These CAARs were used for
comparision using the Paired Samples T-test for intra variable (announcement effect
of share repurchase/Dividends) comparisions and Independent Samples T-test was
used for comparision of returns between the two types of cash distribution methods
namely Share buybacks and Dividends.
A. Normality Tests:
In order to test the hypotheses regarding differences between returns pre and post
dividend announcement and repurchase announcement, two types of T-tests were
conducted. However, since T-Tests are parametric in nature, the normality of the
dataset was confirmed using the Shapiro –Wilk Test and the Kolmogrov Smirnov
Test. It was found that the majority of the data confirms to normality. Only the
dataset of CAAR of Share Buyback Announcement Day +1 day, +5 day and -1 day is
not normal. However, since T-test is robust for non-normal distributions also, paired
samples T-test has been used to compare the before and after announcement
period returns.
Tests of Normality for Share Buybacks
a
Cumulative Average Abnormal Return Share Buyback
Announcement Day +1
Cumulative Average Abnormal Return Share Buyback
Announcement Day +2
Cumulative Average Abnormal Return Share Buyback
Announcement Day +3
Cumulative Average Abnormal Return Share Buyback
Announcement Day +4
Cumulative Average Abnormal Return Share Buyback
Announcement Day +5
Cumulative Average Abnormal Return Share Buyback
Announcement Day -1
Cumulative Average Abnormal Return Share Buyback
Announcement Day -2
Cumulative Average Abnormal Return Share Buyback
Announcement Day -3
Cumulative Average Abnormal Return Share Buyback
Announcement Day -4
Cumulative Average Abnormal Return Share Buyback
Announcement Day -5
*. This is a lower bound of the true significance.
a. Lilliefors Significance Correction
Kolmogorov-Smirnov
Shapiro-Wilk
Statistic
df
Sig. Statistic
df
Sig.
.209
29
.002
.912
29
.019
.114
29
.200
*
.975
29
.703
.126
29
.200
*
.954
29
.233
.133
29
.200
*
.929
29
.053
.188
29
.010
.917
29
.026
.160
29
.055
.905
29
.013
.126
29
.200
*
.948
29
.159
.117
29
.200
*
.940
29
.101
.117
29
.200
*
.962
29
.373
.117
29
.200
*
.951
29
.194
The data for dividends conforms to normality. Only the CAAR for announcement
date -5 days is not normal. However, since T-test is robust for non normal
distributions as well, here the paired samples T-test has been used to see the
announcement effect around dividend declaration.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Tests of Normality for Dividends
Kolmogorov-Smirnova
Statistic
df
Sig.
.170
16
.200*
Statistic
.906
Shapiro-Wilk
df
16
Sig.
.102
16
.200*
.945
16
.414
16
.200*
.967
16
.794
16
.200*
.970
16
.842
16
.200*
.962
16
.700
16
.200*
.908
16
.110
16
.200*
.974
16
.898
16
.200*
.923
16
.188
16
.200*
.913
16
.129
16
.016
.839
16
.009
Cumulative Average Abnormal
Returns around dividend
announcment day + 1
Cumulative Average Abnormal
.127
Returns around dividend
announcment day + 2
Cumulative Average Abnormal
.125
Returns around dividend
announcment day + 3
Cumulative Average Abnormal
.091
Returns around dividend
announcment day + 4
Cumulative Average Abnormal
.126
Returns around dividend
announcment day + 5
Cumulative Average Abnormal
.130
Returns around dividend
announcment day - 1
Cumulative Average Abnormal
.138
Returns around dividend
announcment day -2
Cumulative Average Abnormal
.130
Returns around dividend
announcment day -3
Cumulative Average Abnormal
.163
Returns around dividend
announcment day -4
Cumulative Average Abnormal
.238
Returns around dividend
announcment day -5
*. This is a lower bound of the true significance.
a. Lilliefors Significance Correction
B. Paired Samples T-Test:
H0: There is no significant difference in the Cumulative Average Abnormal
Returns pre and post announcement of Share Buybacks by companies.
H1: There is a significant difference between the Cumulative Average
Abnormal Returns pre and post announcement of Share Buybacks by companies.
The above hypothesis was tested for 5 days before announcement of the buybacks
and 5 days after announcement of buybacks.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Paired Samples Test for Comparision of CAARs for Buyback Announcements
Paired Differences
t
df Sig.
(2Mean
Std. Deviation Std. Error 95% Confidence Interval
Mean
of the Difference
tailed)
Lower
CAAR Buyback
announcement
Day +1 - CAAR
Buyback
announcement
Day -1
CAAR Buyback
announcement
Day +2 - CAAR
Buyback
announcement
Day -2
CAAR Buyback
announcement
Day +3 - CAAR
Buyback
announcement
Day -3
CAAR Buyback
announcement
Day +4 - CAAR
Buyback
announcement
Day -4
CAAR Buyback
announcement
Day +5 - CAAR
Buyback
announcement
Day -5
Upper
-.00715559
.0696920438
.012723968 -.0331790324
.0188678412
-.562
29
.578
-.086202144
.1223587923086
.022339556 -.1318916680
-.0405126201
-3.85
29
.001
-.067153805
.1475866042257
.026945504 -.1222635489
-.01204406154
-2.49
29
.019
.0814930320
.1841143200961
.033614522
.0127436150
.150242449055
2.424
29
.022
.0358742397
.1956391167950
.035718652 -.0371786070
.108927086567
1.004
29
.324
It can be observed from the above results that there is a statistically significant
difference between stock returns pre and post announcement day for days 2, 3 and
4. It means that the announcement of share buyback has had some impact on the
share price on day 2, day 3 and day 4 after the buyback. However the difference in
mean returns one day pre and post announcement and fifth day pre and post
announcement is not statistically significant. The differences are statistically
significant at a 95 percent confidence interval. The T values are negative for days 1,
2 and 3 which means that the returns have declined after the announcement of
share buybacks. However, the decline on day 1 after announcement is not
significant. On day 4 and 5, the T values are positive which means that the returns
on day 4 and 5 after announcement were more that the returns on day 4 and 5
before the announcement. The positive difference on day 4 is statistically significant
whereas on day 5 there is a positive change in returns but the difference is not
statistically significant. The positive returns on day 4 and 5 can be attributed to the
price rise due to a buying pressure on the stock in anticipation of the repurchase at a
premium to the market price. Since, most buybacks are done at a premium to the
market price, the share price is likely to increase atleast to the amount of premium
being offered. In a country like India, where share repurchases/buybacks is a
relatively recent phenomenon, it can be assumed that the market takes a little time to
understand the nuances of the buybacks being positive actions of the companies.
Buybacks, unlike dividends do not elicit immediate euphoria in the scrip price post
announcement, but once the news is absorbed, buybacks too show positive
abnormal returns post announcement.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Paired Samples Test for Comparision of CAARs for Buyback Announcements
Mean
CAAR for
P
dividend
a
announcment
i
day + 1 – CAAR
r
for dividend
announcment
1
day - 1
CAAR
P
for dividend
announcment
a
day
+i 2 – CAAR for
dividend
r
announcment day
-2
2
CAAR
P
for dividend
announcment
a
day
+i 3 – CAAR for
dividend
r
announcment day33
CAAR
P
for dividend
announcment
a
day
+i 4 – CAAR for
dividend
r
announcment day44
CAAR
P
for dividend
announcment
a
day
+i 5 – CAAR for
dividend
r
announcment day55
Paired Differences
Std.
Std. Error
Deviation
Mean
t
95% Confidence
Interval of the
Difference
Lower
Upper
.0543436
.10923
.0817870
.0515012
.0128754
.0052523
.0365727
.00914318
-.0142359
.0092630
.040496
.006324
.0161654
.0572540
.0155842
.0327252
df
Sig.
(2tailed
)
6.352
15
.000
.024740
.574
15
.574
-.0035193
.022045
1.465
40
.151
.0089415
-.0019061
.03423
1.808
40
.078
.0065450
.0020759
.02909
2.381
24
.026
The results of comparision of means for dividends are slightly different from the
results of the share repurchases. It is surprising to note that whereas in the share
buybacks stock returns (CAARs) around 1 day pre and post repurchase and stock
returns around 5 days pre and post repurchase were not significantly different from
each other whereas in case of dividends, the stock returns in these two windows, i.e.
-1 to +1 and -5 to +5 have been found to be significantly different from each other.
The t- value is positive which indicates that the returns in the post dividend
declaration period are higher than the returns in the pre declaration period. The
returns(CAARs) on day 4 after the declaration are significantly higher than the
returns pre declaration at 10 percent confidence interval but not at 5 percent
confidence interval. The reason for this could be that since dividends are something
which investors and shareholders are very familiar with, the dividend information
effect is immediately absorbed by the market and the investors are show most
excitement on day 1 after the declaration of dividend. By day 2, the information is
absorbed by the market and abnormal returns do not accrue to the stockholders. The
abnormal increase in returns on day 5 can be attributed to fundamental
characteristics of the company such as good results or increased operating
efficiency which would then be discounted by the market factors later. However, the
abnormality of returns on day 5 can be further investigated by controlling other
variables which affect stock prices.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
C. Comparision of CAARs around announcements of buybacks and
dividends:
a) Time Window -5 days to +5 days around announcement:
Group Statistics
comprision of CAARs for
buybacks and dividends for
window -5 to +5
Groups
buybacks
N
60
50
dividends
Mean
.032277876917
.002975015060
Std. Deviation Std. Error Mean
.10607669372
.01369444227
.03082548029
.00435938122
It can be observed from the above table that the mean return for buyback
announcement is higher than mean return for dividend announcement.
Independent Samples Test
Levene's
Test for
Equality of
Variances
F
Sig.
comprision
of CAARs
for
buybacks
and
dividends
for window
-5 to +5
t-test for Equality of Means
t
df
Equal
64.68 .000 1.887
108
variances
assumed
2.039 70.689
Equal
Sig.
Mean
(2Difference
tailed)
Std. Error
Difference
95% Confidence Interval
of the Difference
Lower
Upper
.062 .02930286 .0155306181
-.0014815 .06008724
.045 .02930286 .0143715675
.0006445 .05796113
variances
not
assumed
H0: The variances of CAARs from buyback announcement and dividend
announcement are equal.
H1: The variances of CAARs from buyback announcements and dividend
announcement are not equal.
In the above table the F value is 64.68 and it is statistically significant at 95 per cent
confidence intervals. So we reject the null hypothesis that the variances of the two
groups are equal. It means that the variances of CAARs for Share Buyback
announcements are not equal to the variances of CAARs for Dividend
announcements. So the t-value associated with unequal variances is taken into
consideration. The positive t – value is statistically significant (0.045) at 95 per cent
confidence interval. Hence, it can be said that the CAARs around buyback
announcements are significantly higher than the CAARs around dividend
announcement for a 5 day window pre and post announcement date.
b) Time Window -4 days to +4 days around announcement:
Group Statistics
comprision of CAARs for
buybacks and dividends for
window -4 to +4
Groups
buybacks
dividends
N
Mean
60 -.029004975067
82 -.006593949061
Std. Deviation Std. Error Mean
.1139589521
.0147120374
.0419838840
.0046363443
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Independent Samples Test
Levene's
Test for
Equality of
Variances
F
Sig.
comprision
of CAARs
for
buybacks
and
dividends
for window
-4 to +4
Equal
variance
s
assume
d
Equal
variance
s not
assume
d
63.54
.000
t-test for Equality of Means
t
df
-1.637
140
-1.453 70.792
Sig.
Mean
Std.
95% Confidence Interval
(2- Difference
Error
of the Difference
taile
Differenc
Lower
Upper
d)
e
.104
-.02241 .0136891
-.0494751
.0046531
.151
-.022411 .0154252
-.0531697
.00834770
Here the F value is 63.54 and its associated significance value is .000 which means
that the variances of CAARs around share buyback announcements and dividend
announcements are not equal. Hence, we use the t – value with unequal variances
to test the equality of means. The t – value is -1.453 and the associated significance
level is 0.151 which means that there is no significant difference between mean
CAARs of both the groups. Hence, the announcement effect of both the types of
cash distribution methods is almost the same.
c) Time Window -3 days to +3 days around announcement:
Group Statistics
comprision of CAARs for
buybacks and dividends for
window -3 to +3
Groups
buybacks
N
60
82
dividends
Mean
-.020563962
.000166793
Std. Deviation Std. Error Mean
.091735122
.0118429534
.029682646
.003277899
From the descriptive statistics one can observe a difference in the mean returns of
both the groups.
Independent Samples Test
Levene's
Test for
Equality of
Variances
F
Sig
.
comprisi
on of
CAARs
for
buyback
s and
dividend
s for
window
-3 to +3
Equal
variances
assumed
Equal
variances
not
assumed
t-test for Equality of Means
t
140
Sig. Mean
(2- Differe
taile
nce
d)
.057 -.0207
-1.68 68.095
.096 -.0207
81.5 .00 -1.91
df
Std. Error
Difference
95% Confidence Interval of
the Difference
Lower
Upper
.0108198
-.04212222
.0006607
.0122882
-.0452508
.003789
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
In the stock returns data in the 3 day window, the F value is 81.57 and is significant
at the 95 per cent confidence interval. Hence, it can be inferred that the variances of
CAARs for buybacks and dividends for the 3 day time window are not equal. The tvalue associated with unequal variances for the above mentioned group is -1.68 and
is statistically not significant at the selected confidence interval of 95 percent. It is
significant at the 90 per cent confidence interval. It can be said that there is no
statistically significant difference between the mean CAARs of both the groups.
d) Time Window -2 days to +2 days around announcement:
Group Statistics
comprision of CAARs for
buybacks and dividends for
window -2 to +2
Groups
buybacks
N
dividends
Mean
60 -.095237886333
32 .003527896156
Std. Deviation Std. Error Mean
.094498666332
.01219972536
.029210586357
.00516375092
A big difference in the mean returns of both the groups is indicated by the descriptive
statistics.
Independent Samples Test
Levene's
Test for
Equality of
Variances
F
Sig.
comprision
of CAARs
for
buybacks
and
dividends
for window 2 to +2
Equal
variances
assumed
23.23
.000
Equal
variances
not
assumed
t-test for Equality of Means
t
df
Sig.
(2tailed
)
-5.75
90
-7.45
77.31
Mean
Differenc
e
Std.
Error
Differen
ce
.000 -.0987657
.017163
95% Confidence
Interval of the
Difference
Lower
Upper
-.132864
-.06466
.01324
-.125143 -.072388
.000
-.098765
The F value is 23.23 and is significant which indicates unequal variances. The
associated t- value is 77.31 and is statistically significant at 95 per cent confidence
interval. Hence, there is a significant difference between mean CAARs of share
buybacks and dividends around the 2 day window of the announcement date. Since
the t – value is positive, it can be said that the announcement period return of share
buybacks is more than the announcement period returns of dividends.
e) Time Window -1 days to +1 day around announcement:
Group Statistics
comprision of CAARs for
buybacks and dividends for
window -1 to +1
Groups
buybacks
dividends
N
Mean
60 -.132802855133
32 .038818331344
Std. Deviation Std. Error Mean
.0682522571
.00881132851
.0541515517
.0095727323
Descriptive statistics once more indicate a difference in the mean values.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Independent Samples Test
comprision
of CAARs
for
buybacks
and
dividends
for window
-1 to +1
Equal
variances
assumed
Levene's
Test for
Equality of
Variances
F
Sig.
t
2.904 .092
-12.29
-13.19
Equal
variances
not
assumed
t-test for Equality of Means
df
Sig.
(2tailed)
Mean
Differenc
e
Std. Error
Differenc
e
90
.000
-.171621
.0139544
95% Confidence
Interval of the
Difference
Lower
Upper
-.199344
-.143898
76.8
.000
-.171621
.0130106
-.197529
-.145712
The F statistic is not significant and hence here equal variances are assumed. The
associated t- value is -12.29 which is significant at a confidence interval of 95 per
cent. Hence, the mean CAARs due to announcement effects of buybacks and
dividends are significantly different from one another. The negative value of t
indicates that the mean CAARs of dividend announcement far exceed the mean
CAARs of buyback announcements.
D. Overall Differences in Returns:
Group Statistics
comparision of CAARs for
buybacks and dividends
overall
Groups
buybacks
N
dividends
Mean
300 -.049066360330
278 .003513680989
Std. Deviation Std. Error Mean
.11194292625
.0064630278
.03927370888
.0023554805
The mean CAAR for dividend announcement is visibly much higher than the mean
CAAR for buyback announcement.
Independent Samples Test
Levene's
Test for
Equality of
Variances
F
Sig.
comprisi
on of
CAARs
for
buyback
s and
dividend
s overall
Equal
varianc
es
assum
ed
Equal
varianc
es not
assum
ed
t-test for Equality of Means
t
df
Sig.
(2tailed)
Mean
Difference
Std. Error
Difference
213.4 .000 -7.41
576
.000
-.05258004
.00708680
-7.6
376.
535
.000
-.0525800
.0068788
95% Confidence
Interval of the
Difference
Lower
Upper
-.0664991
-.03866
-.0661058
-.03905
The CAAR for dividend and buyback announcement for all the 5 days were taken
together to get an overall idea about the market’s reaction to both the types of
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
announcements. The F value of 213.4 is significant at 95 per cent confidence interval
and hence one can safely say that the variances of both the groups are not equal.
The t-value is -7.41 and is also statistically significant which indicates that overall,
the market return from dividend announcement is significantly higher than the market
return from buyback announcement.
5. Findings and Conclusion:
In this study about announcement effects of share buybacks and dividends, the data
of 30 instances of share buybacks and 137 instances of dividend declarations have
been studied. In examining the presence of abnormal returns around announcement
date, it was found that the returns(CAARs) on day 1 after buyback announcement
were not significantly different from the returns(CAARs) 1 day pre announcement.
The pre and post announcement returns of day 2 and day 3 are significantly different
from each other but the t-value is negative; which is indicative that the share price
returns have declined post announcement. The pre and post announcement returns
are significantly different from each other for day 4 and the t value is positive. It can
be inferred that market reacted positively to the announcement on day 4. The t value
for day 5 is also positive indicating that the post announcement returns are more
than pre announcement returns, but this value is not statistically significant. It is felt
that since open market buyback offers remain open for several months, the impact
on returns can be calculated over a longer time window.
The announcement impact of dividend was felt the most on day 1 after
announcement where the CAAR for announcement day +1 is significantly higher
than the CAAR for announcement day -1. It means that the immediate reaction of the
markets to the dividend announcement by companies was positive. Significant
differences in pre and post announcement returns were not seen on days 2, 3 or 4.
Again on day 5 the post announcement return was significantly higher than pre
announcement return.
In comparing the CAARs for buyback announcements and dividend announcements,
for the 5 day pre and post announcement window, unequal variances were observed
for both the groups and it was found that the returns for buyback announcements
were significantly higher than the returns for dividend announcements. Same was
observed for pre and post announcement returns for the two day window. For day 4,
the variances were significantly different from each other but the mean returns were
not found to be different for the two groups. A similar phenomenon was observed for
the 3 day window, pre and post announcement. For the day 1 pre and post
announcement window, no significant difference between the CAARs for buyback
announcement or dividend announcement was found.
When an overall comparision for all the 5 time windows together was carried out, it
was found that the returns due to dividend announcements are significantly higher
than the returns due to buyback announcements.
For this particular sample of Indian companies, positive post announcement effects
were found for both the types of cash distribution methods namely dividends and
buybacks. However, the market’s euphoria for dividend announcements seems to be
more than that for share buybacks. The stock returns due to dividend
announcements are higher than the stock returns due to buyback announcements.
One of the primary reasons for this could be lack of investor awareness about the
benefits of buybacks vis-à-vis dividends. Dividend is still probably one of the most
popular benchmarks for gauging the performance of a company in India.
Proceedings of Annual Paris Business Research Conference
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ISBN: 978-1-922069-82-5
i
Since share buybacks are also referred to as share repurchases in many a financial literature, the
words repurchases and buybacks have been used interchangeably in this paper and mean the same.
ii
Since the number of share repurchases were much lesser than number of dividend payouts, open
offer share repurchase data of two years (2013-14 & 2014-15 has been included).
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