Determinants of the choice of share buyback methods: A study in India

Figures & data

Table 1. Snapshot of open market and tender method

Characteristics	Open market method (OnMobile Global Limited)	Tender method (Justdial Limited)
Board meeting For approval of buyback	4 February 2016	4 June 2015
Opening of the offer	22 February 2016	25th February,2016
Closing Of the offer	27th June,2016	10th March,2016
Maximum Number of shares to be bought	56,00,000	10,61,499
Shares Before buyback	10,96,43,996	7,05,20,004
Maximum price	Rs 150 per share	Rs 1550 per share
Maximum amount to be used	700 Million	1645.32345 Million
Shares bought back	56,00,000	10,61,499
Amount utilized	638.86 Million	1645.32345 Million
Highest price	Rs 127 per share (BSE), Rs 127.5 (NSE)	NA
Lowest price	Rs 94.20 per share (BSE), Rs 93.95 (NSE)	NA
Average price	Rs 114.08 per share	NA
Price on announcement date	RS 109.70 per share (NSE),RS 110.20 (BSE)	Rs 930.60 per share (NSE),Rs 929.35 (BSE)
Shares post buyback	10,40,43,996	6,94,73,611#
Promoters shares bought back	NA	3,45,854
Promoter holding pre buyback	46.44	32.57
Promoter holding post buyback	48.94	32.62

Note: The table illustrates the mechanism of two widely popular buyback methods (Tender and Open market) in India by taking one company from each method. OnMobile Global Limited and Justdial Limited have done buyback by opting open market method and tender offer together, respectively.

Table 2. Incentive for tender method

Tender method hypothesis	Sign	Variable specification (notation)
Free cash flow hypothesis
Companies having excess cash and lesser investment opportunities are more likely to undertake tender offer when companies want a speed reduction in the agency cost.	+	Cash available in the previous year of repurchase to the total asset (CASH/TA).Cash flow from operation in the previous year of repurchase to the total asset (CFO/TA). Tobin’s Q: Market value of asset to book value of asset in the previous year of share repurchase (Tobin’s Q). Dummy Variable: Dummy variables represents higher cash and lower investment opportunities (HFO) and higher cash flow and low investment opportunities (HCFLO)
Substitution hypothesis
Preference for tender offer over open market method for share repurchases.	-	Dividend yeild is calculated as dividend paid in the previous year of share repurchase announcemnt scaled by market capitalisation. Dividend payout ratio is calculated as dividend paid as a percentage of profit after tax.
Insider ownership and agency cost hypothesis
The insider ownership either positively or negatively influences the choice of share repurchase methods.	±	Promoter ownership before buyback announcement and change in the percentage of ownership post buyback.
Leverage hypothesis
The higher the excess leverage, the greater the likelihood of a company choosing tender method for share repurchases.	+	Excess leverage is measured as the difference between target and actual debt to total paid-up capital and free reserves. We have taken another variable that is the ratio of total liabilities to total asset in the previous year of share repurchase.
Liquidity hypothesis
Stock market liquidity has a negative influence of choosing of tender offer for share repurchase.	-	Number of shares traded in the previous year of share repurchase to outstanding shares (T/R)
Signaling hypothesis
Firms chose tender method for long term undervaluation and chose open market method for correcting short term undervaluation.	±	Price-to-book ratio (PB) and earning to price ratio (EPR) in the previous year of share repurchase. Three-year ordinary cumulative return and CAR (−63, −4) are also taken for measuring long term and short term undervaluation, respectively.

Note: The table presents the proposed hypotheses that have a bearing on the selection of buyback methods in India and the variables corresponding to the hypothesis taken for this study. This also indicates the relationship between the proposed variables and the selection of tender offer.

Table 3. Year-wise classification of share buyback into tender and open market methods

Year	Total buybacks	Tender method	Open market method	Percentage of tender offer	Total buyback vValue (In Rs Lakh)	Tender offer value (In Rs Lakh)	Open Market Value(In Rs Lakh)
1999	11	10	1	90.91	5843.2	5643.42	200
2000	13	11	2	84.62	129,676.3	95,982.26	33,694
2001	27	6	21	22.22	215,410.4	12,868.57	202,541.8
2002	31	16	15	51.61	101,073.6	63,427.57	37,646.05
2003	8	3	5	37.5	5172.7	4366.46	806.21
2004	11	4	7	36.36	359,977.6	14,707.33	345,270.3
2005	10	1	9	10	36,259.8	61.04	36,198.77
2006	7	1	6	14.29	29,524.4	5247.84	24,276.52
2007	10	3	7	30	200,444.4	26,346.75	174,097.7
2008	37	3	34	8.11	421,793.9	14,875.56	406,918.4
2009	20	1	19	5	82,397.9	3999.6	78,398.3
2010	20	7	13	35	429,502.9	295,376	134,126.9
2011	35	1	34	2.86	1,376,544	962.43	1,375,582
2012	21	2	19	9.52	169,410	19,159.2	150,250.8
2013	32	5	27	15.63	1,138,309	291,335.1	846,973.8
2014	10	5	5	50	60,521.1	37,878.12	22,643
2015	17	12	5	70.59	148,287.8	124,967.8	23,320
2016	45	35	10	77.77	3,140,938	2,899,807	241,131
2017	65	50	15	76.92	5,156,759	4,834,678	322,081.1
Total	430	176	254		1.3E+07	8,751,690	4,456,156

Note: Total buyback in a year is of all buyback made during the financial year by using both tender and open market method. Tender method is the number of buyback made by using tender method only in a financial year. Open market method is the number of buyback made by using open market method only in a financial year. Percentage of tender offer is the percentage of total buyback made by using tender offer only. Total value is the aggregate value of all the buyback made in a financial year. Tender value is the sum of all buyback by the tender offer method in a given financial year. Open market value is the sum of all buybacks by the open market method in a given financial year.

Table 4. Summary statistics of open market offer

	Mean	Median	Minimum	Maximum	Std. dev.	C.V.	Skewness	kurtosis
D_P	59.31	7.79	−23.35	1903.1	213.87	3.61	6.42	44.87
C_SH	0.08	0.04	0	0.54	0.10	1.23	2.23	5.35
C_FL	0.10	0.10	−0.39	0.74	0.12	1.22	0.56	5.30
HFO	0.13	0	0	1	0.34	2.60	2.21	2.88
HCFLO	0.16	0	0	1	0.37	2.26	1.81	1.29
TLTA	0.48	0.35	0.4	2.05	0.48	1.01	0.73	−0.49
TobinQ	1.32	0.83	0.3	13.74	1.50	1.14	4.22	25.69
P_Shold (%)	48.82	49.15	10.02	88.15	15.41	0.32	−0.48	0.53
Turn_Over	0.01	0.00	0	0.64	0.08	5.24	6.19	38.54
∆P_OWN	5.14	3.71	−7.50	33.14	5.86	1.14	2.27	7.29
Return3 Years	0.54	0.36	−1.57	6.44	1.04	1.92	1.57	5.45
Return644	−0.08	−0.02	−1.13	0.66	0.37	4.35	−0.56	−0.11
Div_Yield	0.03	0.02	0	0.44	0.04	1.37	5.06	41.30
LE_V	1.75	1.89	0.68	2	0.32	0.18	−1.45	1.47
P_B	2.17	1.06	0.06	35.21	3.92	1.81	5.14	32.01
E_PR	0.11	0.09	−0.98	1.30	0.21	1.95	0.23	11.54

Table 5. Summary statistics of tender market offer

	Mean	Median	Minimum	Maximum	Std. Dev.	C.V.	Skewness	kurtosis
D_P	19.65	5.89	−50.63	213.65	36.12	1.84	2.87	10.48
C_SH	0.12	0.04	0	0.76	0.15	1.28	1.76	3.06
C_FL	0.11	0.10	−0.16	0.66	0.11	1.00	1.39	5.10
HFO	0.14	0	0	1	0.34	2.54	2.13	2.54
HCFLO	0.15	0	0	1	0.35	2.43	2.01	2.03
TLTA	0.28	0.09	0.2	1.47	0.37	1.31	1.39	1.26
TobinQ	1.48	0.93	0.1	8.24	1.60	1.09	2.22	5.42
P_Shold(%)	60.33	62.02	25.81	90	14.20	0.24	−0.44	−0.48
Turn_Over	0.00	0.00	0	0.01	0.00	1.63	2.68	7.31
∆P_OWN	4.64	1.93	−98.76	33.30	14.62	3.15	−3.32	24.51
Return3 Years	0.63	0.57	−1.14	3.11	0.74	1.18	0.81	1.07
Return644	−0.01	0.04	−1.10	0.52	0.33	31.32	−1.28	1.62
Div_Yield	0.04	0.02	0	0.18	0.04	1.11	1.25	0.81
LE_V	1.89	2	0.66	2	0.20	0.10	−3.25	14.11
P_B	2.44	1.21	0	18.62	3.08	1.26	2.73	8.93
E_PR	0.05	0.04	−0.41	0.34	0.09	1.73	−1.04	7.70

Note: Tables 4 & 5 shows the descriptive statistics open market and tender offer, respectively.

Legends:

D_P: Dividend paid in the previous year of buyback as a percentage of profit after tax.

Div_ Yield: Dividend paid in the previous year of buyback scaled by market capitalisation.

C_SH: Cash balance available scaled by total asset in the previous year of share repurchase.

C_FL: Cash flow from operational activity scaled by total asset in the year preceding share repurchase.

Tobin’s Q: Market value of the asset to book value of the asset in the previous year of share repurchases.

TL/TA: Total liability as a percentage of total asset in the previous year of share buyback.

LE_V: Leverage is measured as the difference between target and actual debt to total paid-up capital and free reserves.

CAR (−63, −4): Cumulative abnormal return calculated by market model from 63 days prior to announcement of share buyback to 4 days prior to announcement.

3 Years Return: It is the sum of ordinary return 3 year prior to public announcement excluding the month of public announcement.

E_PR: Average earning to price ratio in the last three months before share repurchases announcement.

P_B: Average Market value of equity to book value of equity in the last three months before share repurchases announcement.

Prom_Own: Promoters holding in the previous year of share buyback.

∆Prom_Own: Change in the percentage of promoters holding post buyback.

Turn_Over: Turnover ratio is calculated as number of shares traded to outstanding shares in the previous year of share repurchase announcement.

Table 6. Profile of 337 repurchasing firms segregated in tender and open market method before buyback

		All Firms(337)	OMR(198)	Tender Offers(139)	Difference in Mean & Median
SHERP_SIZE	Mean	11.33	9.06	16.05	−2.88***
	Median	6.72	5.85	9.5	2.01**
Total_ASSET (Lakh)	Mean	381,022.4	385,202	372,130	0.07
	Median	58,228.5	57,387.5	65,747.5	0.5
Mark_CAP(Lakh)	Mean	643,174.1	504,455	944,737	−1.13
	Median	41,695.7	37,843.4	58,920	0.98
D_P	Mean	46.49	59.31	19.65	2.55**
	Median	6.99	7.99	5.89	−0.8
Div_ Yield	Mean	0.03	0.03	0.04	−1.35
	Median	0.02	0.02	0.02	0.77
C_SH	Mean	0.09	0.08	0.12	−2.37**
	Median	0.04	0.04	0.04	0.84
C_FL	Mean	0.1	0.1	0.11	−0.99
	Median	0.1	0.1	0.1	0.73
Tobin’s Q	Mean	1.37	1.32	1.48	−0.81
	Median	0.85	0.83	0.93	0.05
TL/TA	Mean	0.41	0.48	0.28	3.78***
	Median	0.29	0.35	0.09	−3.29***
LE_V	Mean	1.8	1.75	1.89	−4.84***
	Median	1.96	1.89	2	4.06***
CAR (−1,+1)	Mean	0.02	0.01	0.03	−1.98**
	Median	0.01	0.01	0.01	1.68*
CAR (−63,-4)	Mean	−0.06	−0.08	−0.01	−1.75*
	Median	0	−0.02	0.04	1.84*
3 Years Return	Mean	0.57	0.54	0.63	−0.85
	Median	0.41	0.36	0.57	1.51
E_PR	Mean	0.09	0.11	0.05	3.12***
	Median	0.08	0.09	0.04	−4.96***
P_B	Mean	2.17	2.17	2.44	−0.65
	Median	1.06	1.06	1.21	1.76*
Prom_Own	Mean	52.54	48.82	60.33	−6.35***
	Median	53.03	49.15	62.02	5.89***
∆Prom_Own	Mean	4.98	5.14	4.64	0.32
	Median	3.47	3.71	1.93	−1.84*
Turn_Over	Mean	0.01	0.01	0	2.51**
	Median	0	0	0	−3.81***

Note: For difference in mean, we have used T-test and for the difference in median, Wilcoxon rank sum test is used.

Legends:

SHERP_SIZE: Total number of shares offered for buyback divided by the number of outstanding shares. Total_ASSET: Total asset in the balance sheet in the previous year of share buyback; Mark_CAP: Market capitalization of repurchasing companies in the previous year of share repurchase; D_P: Dividend paid in the previous year of buyback as a percentage of profit after tax; Div_ Yield: Dividend paid in the previous year of buyback scaled by market capitalization; C_SH: Cash balance available scaled by total asset in the previous year of share repurchase; C_FL: Cash flow from operational activity scaled by total asset in the year preceding share repurchase; Tobin’s Q: Market value of the asset to book value of the asset in the previous year of share repurchases; TL/TA: Total liability as a percentage of total asset in the previous year of share buyback; LE_V: Leverage is measured as the difference between target and actual debt to total paid-up capital and free reserves; CAR (−1, +1): Cumulative abnormal return calculated around three days of public announcement; CAR (−63, −4): Cumulative abnormal return calculated by market model from 63 days prior to announcement of share buyback to 4 days prior to announcement;3 Years Return: It is the sum of ordinary return 3 year prior to public announcement excluding the month of public announcement; E_PR: Average earning to price ratio in the last three months before share repurchases announcement; P_B: Average Market value of equity to book value of equity in the last three months before share repurchases announcement; Prom_Own: Promoters holding in the previous year of share buyback; ∆Prom_Own: Change in the percentage of promoters holding post buyback; Turn_Over: Turnover ratio is calculated as number of shares traded to outstanding shares in the previous year of share repurchase announcement; D_P: Dividend paid in the previous year of buyback as a percentage of profit after tax; Div_ Yield: Dividend paid in the previous year of buyback scaled by market capitalization.

Table 7. Correlation matrix

	Share_rep	D_p	C_sh	C_fl	Hfo	Hcflo	TL/TA	Tobinq	Prom_own
Share_rep	1
D_p	-0.1	1
C_sh	0.16	0	1
C_fl	0.06	0.11	0.04	1
Hfo	0.01	-0.05	0.02	-0.49	1
Hcflo	-0.02	-0.06	0.01	-0.58*	0.9	1
TL/TA	-0.2	-0.04	-0.24	-0.09*	-0.01	-0.02	1
Tobinq	0.05	0.27*	0	0.31*	-0.1	-0.13	-0.09	1
Prom_own	0.30*	0.06	0.03	0.05	0.01	0	-0.1	0.17	1
Turn_over	-0.1	-0.03	-0.04	0.01	-0.05	-0.06	0.01	0.03	0.01
∆Prom_Own	-0.02	-0.06	-0.03	-0.12	0.01	0.03	0.04	-0.27*	-0.25*
Return3years	0.04	-0.07	-0.06	0.16	-0.05	-0.05	0	0.05	-0.04
Return644	0.1	-0.04	0.01	0.07	-0.04	-0.07	-0.02	0.05	0.07
Div_yield	0.07	0	-0.02	-0.07	-0.14	0.01	-0.01	-0.14	-0.04
Le_v	0.26*	0.03	0.15	0.01	0.05	0.06	-0.79*	0.06	0.15
P_b	0.03	-0.02	0.08	-0.08	0.07	0.08	-0.03	0.03	0.05
E_pr	-0.14	0.26*	-0.14	0.01	-0.06	-0.03	0.03	0.02	-0.12
	Turn_over	Change_own	Return3years	Return644	Div_yield	Le_v	P_b	E_pr	VIF
Share_rep
D_p									1.1
C_sh									1
C_fl									1.8
Hfo									5.9
Hcflo									6.8
TL/TA									2.9
Tobinq									1.3
Prom_own									1.1
Turn_over	1								1
∆Prom_Own	-0.04	1							1.1
Return3years	0.15	-0.03	1						1
Return644	-0.03	-0.05	-0.04	1					1
Div_yield	-0.07	0.17	-0.06	0.04	1				1.2
Le_v	-0.04	-0.04	0.01	0.08	-0.02	1			2.9
P_b	-0.05	-0.05	-0.1	0.11	-0.07	0.07	1		1
E_pr	0.09	0.02	0.12	-0.17	0.08	-0.03	-0.1	1	1.1

Notes: (i) * shows the value significant at 5% level

Note: The table shows the correlation among the variables considered for the multivariate analysis and it also indicate the result of VIF test for multicollinearity.

Table 8. Multivariate logit regressions

	Model-I		Model-II		Model-III		Model-IV		Model-V		Model-VI		Model-VII
Variable	Coeff.	P-Value	Coeff.	P-Value	Coeff.	P-Value	Coeff.	P-Value	Coeff.	P-Value	Coeff.	P-Value	Coeff.	P-Value
Intercept	−1.09***	0.00	−0.74***	0.00	−5.48***	0.01	−4.09***	0.00	−0.7***	0.00***	−0.54	0.00***	−8.91***	0.00
C_sh	2.68***	0.01											0.01*	0.1
C_fl	0.88	0.51											2.22*	0.09
Hfo	1.14	0.32											0.25	0.87
Hcflo	0.97	0.39											2.63*	0.08
D_p			−0.00*	0.08									−2.77*	0.07
Div_yield			3.64	0.21									0.22	0.71
TL/TA					0.11***	0.00							0.06***	0.00
Le_v					2.56***	0.01							7.23**	0.02
Prom_Own							0.06***	0.00					0.02***	0.00
∆Prom_Own							0.02	0.16					0.25*	0.1
Return3 years									0.14	0.29			0.19	0.65
Return(−64, −4)									0.49**	0.04			8.26**	0.03
P_b									0.01	0.72			2.46**	0.03
E_pr									−1.70**	0.03			−0.02*	0.06
Turn_over											−1.39	0.08**	−1.5***	0.1

Notes: ***,** and * show the value of significant at 1%,5% and 10%, respectively.

Note: The table shows presents the results of seven logit regression models, considered in this study. Model 1 considers only cash flow hypothesis, Model 2 considers substitution hypothesis, Model 3 considers leverage hypothesis, Model 4 considers agency hypothesis, Model 5 considers signaling hypothesis, Model 6 considers liquidity and hypothesis and Model 7 considers all the hypotheses simultaneously.