Impact of Buyback of Shares on Financial Performance and Market Value of Firms: A Study of Selected Indian IT Companies

Abstract

Buyback of shares, also commonly known as share repurchases or stock buybacks or share buybacks, is a corporate action where a company repurchases or buys its own outstanding shares from its existing shareholders in the share market. It involves the company using its available cash reserves or raising debt to buy back shares either on the open market or directly from shareholders through a tender offer. There are several factors that influences companies to execute share buybacks. They are not governed by a single factor. Undervaluation, signalling, free cash flows, avoidance of hostile takeovers, improving financial performance through improved EPS, P/E ratio, and ROE, overall Market Value through improved Market Value of equity and reduced book value of debts, and other such factors influence a company's decision to buy back shares. When a company announces a share repurchase, it usually buys back its shares at a price higher than the current market price, signalling to the market that the shares are undervalued in management's opinion because the market is not correctly pricing their shares or because the prices are not very competitive. When a company buys back its own shares, they must be terminated by the company. As a result, the company's share capital is reduced because of the share buyback. The companies cannot purchase its own shares for the sake of investment. A company with enough idle cash may decide to repurchase its own shares.