An Examination of Free Cash Flow Hypothesis in Indian Repurchase Decisions

Repurchase of shares by Indian firms are on the rise in recent years. What motivates Indian firms to repurchase their own shares? Signalling and free cash flow hypotheses are two competitive and popular explanations identified in empirical research in US and other countries. Do Indian firms buy back their shares to correct market misvaluations or to return excess funds? In the present paper an effort is made to decipher the motives behind repurchase decisions of Indian firms. Since there are positive returns only on announcement day and not in post-announcement days the signalling hypothesis cannot be an explanation for positive overall CAR in Indian announcements. The study hypothesizes that Indian firms use repurchases as a part of overall corporate restructuring mechanism of distributing excess funds and build promoters' stake holding. The evidence shows that low-q firms with higher free cash flow ratio earn higher abnormal returns than other firms. The cross-sectional analysis generates positive coefficient for low-q firms with higher cash flow and promoters' control.