Do Indian Companies Manage Earnings Before Share Repurchase?

Abstract

This article aims to detect the opportunistic EM before share buyback and its impact on the short-term and long-term abnormal return. The study also examines the relationship between EM and promoters’ holdings in the company. A sample of 117 companies over 1998–2013 is analyzed in the study. The quality of earnings is measured using discretionary accruals (DAs), and it is calculated by four different methods, that is, the Healy model (1985), DeAngelo model (1986), modified Jones model (1995) and performance-matched model (2005). Cumulative abnormal return (CAR) is calculated for a short-term abnormal return at around 3 days of the share repurchase announcement. Post-buyback buy hold abnormal return (BHAR) for 1 year is calculated for long-term performance. The regression model is used to examine the impact of DA on both CAR and BHAR. The findings of the article show that share buyback companies manage their earnings downward in the previous year of share repurchase than the year of share purchase and the next year of share repurchase. The sample firms deflate their earnings more as compared to matching non-buyback firms. Firms manage their earnings downward before open market share repurchase than the tender offer. There is a significant and negative relationship between abnormal accruals and 1-year buy hold abnormal return post-open market share repurchase. The study further observed that there is a negative relationship between promoters’ holdings and EM. The study is constrained by the small sample size, so the results should be viewed by keeping these limitations in mind. The article is the first study on the detection of the opportunistic EM before buyback and examination of the relationship between the earnings quality and abnormal return in the Indian context.

Valuation Effects of Magnitude and Frequency of Share Repurchases: Indian Evidence

“…EPS improvements are a primary corporate driver of stock repurchases, according to Cao et al (2020), who found a positive correlation between earnings management strategies and stock repurchases in Vietnam. Jena et al (2019) found that promoter holdings and earnings quality are negatively correlated, and Indian companies engage in opportunistic earnings management before buybacks. According to Xu and Taylor (2017), firms use stock repurchases to control earnings.…”