Buyback of Shares and Shareholders' Value Creation: A Study of Indian Corporate Sector

Abstract

Buyback of shares has been used widely as a means of financial restructuring to maximise shareholder's wealth. It reduces the number of outstanding shares and thus enhance earnings per share. As a result, price earnings ratio is also affected. The present paper examines a sample of 128 buyback announcement made by 102 companies listed on BSE during 1999-2012. Four different ratios viz. earnings per share, proprietary ratio, dividend payout ratio and price earnings ratio have been used to analyse the impact of buyback of shares on the financial performance of the companies. Paired t-test has been used to examine these ratios before and after the buyback. The paper finds that there is improvement in EPS, DP ratio and PE ratio while a decrease is found in PP ratio. However, the pre-buyback ratios are not statistically significantly different from the post buyback ratios at 5 % level of significance. Thus it can be concluded that the shareholders value is not largely influenced by the buyback of shares.