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Impact of insider Trading on open Market

Share Repurchase: A study In Indian Context


Presented
By
Sarthak Kumar Jena (NOU/IND/022)
Ramesh Chandra Das(NOU/IND/014)
Shashaikanta Jena(IND/NOU/029)
Saroja Meher(NOU/IND/027)
Sibaprasad Sethi(NOU/IND/034)

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Definition of Share Repurchase
It is a corporate activity by which companies can buy back its
own shares from the shareholders
It is an alternative payout method distinct from dividend
distribution
Decrease in outstanding shares
Decrease in cash position in the company B/S
Increase the ownership concentration

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Difference between Tender Offer and Open Market
Repurchase
Tender offer Open market repurchase
1.Offer amount <= 10% of paid up capital 1.Offer amount <= 10% of paid up capital
and reserve, only BOD approval is needed. and reserve, only BOD approval is needed.

2.Offer amount > 10%, both BOD and 2.Offer amount > 10%, both BOD and
shareholders approval needed. shareholders approval needed.

3.Price is fixed and quantity of share 3.Maximum price and maximum quantity is
repurchased fixed. fixed.

4.It is a commitment from the firm. 3.No commitment. But from 2013
amendment, firm has to buy at least 50% of
the shares announced.

5.Duration is initially in between 15 to 30 5.Duration is initially one year but from


days but from 2012 amendment, duration is 2013 amendment, it reduced to 6months.
reduced to 10 working days.

6.In this offer promoters can tender their


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6.In this offer promoters can not tender 3
shares. their shares.
Contd
Tender offer Open market repurchase
7.It offers significant premium for its shares 7.It is executed at market price Only.
on prevailing market price.

8.It is an inflexible method of buyback. 8.It is a flexible method by design in terms


of how and when companies buyback stock.

9.15% of the offer or number of securities 9.No such provision.


entitled as per their share holding will be
reserved for small share holders.
10.No escrow account is needed. 10. The company has to open a escrow
account with the investment banker of 25%
of the offer amount.

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Process of Buyback in India

Company BOD Shareholders


AoA Law SEBI and stock
approval approval exchange
approval Sec approval
68.69.70

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Year wise Share Repurchases (1999-2015)

No of issues
40
37

35
32

30 29 29
27
25
25

20
20 19

16
15
15
13
12
11
10 9 9

5
5
3

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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Value of Repurchase ( Year wise)
Amount of Repurchase(Rs in Cores)
14000

12000

10000

8000

6000

4000

2000

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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Overview of share Repurchase in India
Industry wise classification of share repurchases
35
29 No of companies
30
24
25 21 20
20 1615 18
15 13 1212 13 12
8 10 8 6 7 6
10 5 7 6
5 2 3 3 4 3 5 3 3 5 2 3 3 4
0

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Reason of Share Repurchases

6
30

Exit

Provide Liquidity

Retrun of Available cash

274

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Contd
Type of Share Repurchases (in %)
2

84

Book building
Stock exchange
Tender offer

225

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Contd

Average Duration of Share Repurchases

250
Days
208
200

150

100 Days

50 38
15
0
Open share repurchases Tender share repurchases Book Building

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Literature Review
Lee et al. (1992) examine the insider trading pattern before the
announcement of the tender offer in U.S market and find that
managers buy more shares and sell fewer shares before the tender
offer and insider trading returns to the normal level after tender
offer is over.
Louis et al. (2010) observe that insiders sell more just after the
announcement of fixed price and Dutch-auction tender offer.
Babenko et al. (2012) find more insider buying than selling before
one year of open market share repurchase announcement. They
also find positive relationship among actual share repurchase and
programme completion and net

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Literature Review
Insider buying.
Chan et al. (2012) examine the interaction of insider trading and
share repurchase on focusing the firm value when market price
deviates from fair value. They find insider trading provides a strong
complement to the repurchase signal where perceived mispricing is
an important factor.
Bonaime and Ryngaert (2013) report an abnormal relationship
between insider trading and share repurchase. They find that share
repurchase follow net insider selling rather than net insider buying.

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Objectives

To examine both net insider selling and buying as a motivation


behind share repurchase decisions.

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Data and Sample Selection

This study covers the data period from 2008-09 to 2013-14.


Insider data collected from Bloomberg database and firm
specific parameters are from Prowess IQ data base.
Total sample firm is 78.
Matching firm is selected on the basis of Industry, Market
capitalization and market to book ratio.

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Univariate Analysis of Share Repurchases Firms
(Within Sample)
t- test
Within Sample Mean Median Wilcoxon Rank Sum test
0.34

Net Insider sales (Before


Buyback) -0.024 0.000

Net Insider Sales (After


Buyback) -0.027 0.000 0.74
1.98**

Net Insider Buy (Before


Buyback) 0.032 0.003

Net Insider Buy (After


Buyback) 0.019 0.000 2.58***

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Univariate Analysis between Sample firms and
Control Firms

Wilcoxon Rank Sum


Sample Firm Control Firm t-test Sample Firm Control Firm test

Variable Mean Mean Median Median

Net Insider sales (Before


Buyback) -0.024 -0.022 -0.84 0.000 0.000 -0.74

Net Insider Buy (Before


Buyback) 0.032 0.018 1.96** 0.003 0.000 3.76***

Net Insider Sales (After


Buyback) -0.027 -0.025 -0.67 0.000 0.000 -0.58

Net Insider Buy (After


Buyback) 0.019 0.010 2.34** 0.000 0.000 1.98**

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Tobit Model

Share_repit it 1Cashi(t - 1) 2DPi(t - 1) 3MBi(t - 1) 4DEi(t - 1)


5Ins_seli(t - 1) 6Ins_buyi(t - 1) 7Firmsizei(t - 1)........ ..... (1)

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Contd
Share_rep: Value of actual share repurchase divided by the
market capitalisation of companies.
DP: Dividend paid in the previous year of share repurchase
divided by profit after tax.
MB: Market to book ratio, calculated by sum of market value of
equity and total debt divided by book value of asset.
DE: Debt to equity ratio, it is calculated as excess gap between the
standard and actual debt equity ratio. Standard is 2 as prescribed
by Indian companies Act 1956.
Ins_sel: Number of shares bought by insiders minus number of
shares sold to total number of shares outstanding in the previous
year.
Ins_buy: Number of shares bought by insiders minus number of
shares sold to total number of shares outstanding in the previous
year.
Firm size: Log value of total asset.
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Result
Model (I) Model (II)

Variable coefficient p-value coefficient p-value

Intercept -0.06 0.36 -0.07 0.25

Cash 0.23 0.09* 0.22 0.10*

DP 0.00 0.75 0.00 0.75

MB -0.02 0.02** -0.02 0.02**

DE 0.05 0.00*** 0.05 0.00***

Ins_sel -0.22 0.25

Ins_buy 0.33 0.05** 0.41 0.01**

Firm size 0.00 0.84 0.00 0.97

Chi-square 26.84 0.00 25.55 0.00

Log-likelihood 19.99 19.32

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Conclusion
Insider trading (BUY and sell) of sample firms are more around
share repurchase than matching firms.
Sample firms buy more shares in the previous year of share
repurchase than the following year of share repurchase.
Insider buying before share repurchase announcement has a
positive influence on share repurchase decisions.

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,

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