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INVESTMENT DECISIONS: STOCK BUYBACKS OR STOCK PRICES?

Byline: BASHEER AHMAD and MAHROONA ANEES

Abstract

Corporations most frequently repurchase their own shares in order to decrease equity. Share buyback is a conventional mean to return something extra to stockholders without increasing the dividend requirements. The investors mostly focus on the volatility of the stock prices instead of company's buyback behavior. The purpose of the study is to highlight the two-way relation between share buybacks and share prices. The sample includes 10 multinational companies. The financial data include 10 years share buybacks and share prices ranging from 2002 to 2012. General Linear Model (GLM) is used to explore the two-way impact between share buybacks and share prices and the panel effect of company and month on both. The results show that stock prices and buybacks are interdependent and buybacks and prices behavior is significant across the month through the year while share buybacks behavior is found different across the companies.

Microsoft, P andG and IBM are inclined towards high buybacks while Honda and Toyota are inclined to low buybacks. Mid of each quarter is important to focus regarding buybacks and end of the quarter is important to focus regarding the share prices. First half of the year is ideal for stock purchasing while second half of the year is ideal for selling.

Key Words: Share Buybacks; Share Prices; Investment Decisions; General Linear Model

Introduction

Every company needs a handsome amount of money to start a business. A corporation that wants to lift principal by selling shares has many alternative ways to do so. A company that is not included in stock exchange has an option of initial public offering in which company is evaluated and an initial price is set for the shares that it is going to be offered. The amount of funding can be lifted with the help of Initial Public Offering (IPO). This depends partially on the supposed value and hence on the stock price and on the interest of the shares.

On the other hand, companies involved in stock exchange have a substitute to begin with a supplementary stock issue that is called as Seasoned Equity Offering (SEO). SEO is a fresh equity already present issue (right issue) that a corporation offers after its IPO. The right issue allows the existing shareholders to buy some new shares at a particular price and within a precise time period. This tender may be discarded or received by every shareholder. Rights are basically moveable and the holder can put up shares for sale in the market.

The firm offers to the existing shareholders to buy more shares generally at low price or at discount as their renouncing right. These rights have a worth and can be bought and sold. If the company wants to issue the rights then it has to decide the cost of the new shares, and evaluate the expected exaggeration of present share value. The firm wants to know whether the whole process will influence the new and present shareholders.

Some companies buy back a small number of shares every year. This is a substitute to increase the dividend. It does not allow the company to sustain the payment that dividends would allow. Another benefit of a share buyback is that it gives shareholders more elasticity than a dividend as it allows shareholders to choose when and where they want to sell their shares. This also helps in minimizing the tax. Shareholders can correct the amount of proportions of their holding and get the same amount of money as dividends. However, this money can be taxed in a different way and can involve broker's commission or other expenses.

The share repurchase is the purchase of exceptional shares by a corporation for the purpose to decrease the amount of shares in the market. Corporations want to repurchase their shares when they want to add to the price of existing shares by decreasing the supply or to remove any pressure by stockholders who want to have the controlling stake.

Corporations most frequently repurchase their own shares in order to decrease equity. Share repurchase is a conventional mean for companies by returning extra money to stockholders without increasing quarterly dividend necessities. This expenditure is single time money distribution that is more than the usual dividend money. The stocks are usually bought back in open market dealings. Share buybacks are very popular as they provide additional currency to stockholders as compared to dividends (Song, 2001).

Shares may be repurchased through two methods. One method is that the shareholders are offered a tender in which they have the alternative to put forward one portion or all of the shares they have, for a certain time period and at the best market price. This gives investors rights for tendering the shares they have as compared to holding them with themselves. The other option is that corporations buy back their stocks in open market over a long time period.

Literature Review

A corporation that needs to lift up the principal through shares offering adopts the following methods or processes.

Issuing the Prospectus: In order to offer the share, a public corporation requests the public through a tender with the help of a book, this is known as prospectus. According to part 5 sections 52 of business ordinance a prospectus, that is issued by the company should have a publication date. A sufficient number of copies of the prospectus issued should be made available at the registration office of the stock exchange where the firm is already registered.

Receiving application: Going through the details provided in the prospectus, the public request the corporation to buy the offered shares through an application. Every request along with the cash should be put forward by the public in a program bank. The corporation is not allowed to take out the cash from the bank until the method of allocation is completed.

Allotments of the stocks: Corporation accepts the proposal made by the contender. The knowledge of share is provided to the stockholders by a dispatch called 'Allotment Letter', highlighting the number of share allotted and deadline for the payment against the number of shares purchased. Share comes into existence after the allotment confirmation; therefore, the invested money becomes the part of the capital of the company after allotment. Board of the directors and the stock exchange together make decision regarding the allotment of the shares.

Mode of Issuing Shares:

Shares are usually offered against cash. In case of offering shares against cash, stocks are offered at parity, at top or at cut rate. The payment can either be made fully at the time of application or in installments. For example, partially with application, partially on allotment, partially on call.

Share Buyback:

There are several reasons of stock buybacks. Supporters of buybacks say that buybacks place money into investor 's hands in a tax-efficient manner. Share buybacks are considered as an efficient way to hand over excess amount of money to share holders (Stephens and Weisbach, 1998). Since the several past years share repurchases have replaced the dividends and are considered as the main way for distributing surplus cash in the U.S. equity market (Song, 2001). According to Hurtt, Kreuze, and Langsam (2008) corporations that have surplus money are unwilling to lift up dividend because the share holders may be displeased with the dividends historic stages. When companies fail to give dividends, stock price is turned down as compared to increase in stock price which is associated with increase in dividends. Share repurchases characteristically produce a strong boost in share prices. Share buybacks announcements themselves drive a constructive alarm to the share price by uplifting prices from 3% to 15%.

Most announcements of buybacks are provoked for the reason to increase stock price immediately. After October 1987 stock market stopped working and companies announced repurchase plans of about $44 billion in order to increase stock prices. In the same way after 11 September attack on World Trade Centre (WTC), many companies announced repurchases in order to maintain their stock prices. Additionally, steady share prices defend managers from stock holders complains. Extra steady share prices maintain confidence and trust worthiness among stock holders. The degree to which organizations' reward, like additional benefit or stock option plans is connected to share price progress. Supervisors have motivation to uphold share prices. Reducing the amount of share available in market with the help of share repurchases companies reduce the future cash dividends (Hurtt et al., 2008).

Firms often buy back shares to change their leverage ratio. Share repurchase help firms to achieve elective leverage ratio. Share buy backs capture much more expensive attempts by increasing the share price (Bagwell and Shoven, 1989). Share buy backs help the companies to avoid unnecessary capture attempts (Bagwell, 1991). Stock buybacks help in increasing earnings per shares without the requirement of rising share prices. Share repurchases can enhance earnings per share to total at steady earnings levels. There is a lot of potential motivation for corporations to follow share repurchases (Lamba and Ramsay, 2000). Some of the motivations are:

1. Shares repurchases often add to the financial leverage that means corporations that have much more capacity for debt often repurchase their shares in order to make their capital structure more attractive.

2. Share repurchases can also occur if the management of the company is having some information that is not common to the general market about future cash flows so as a result, share repurchases will symbolize that the corporation is underrated

3. Share repurchases can be used as self-protective way in order to avoid the aggressive capture by reducing the number of shares.

4. Share repurchases can also relocate wealth to nonparticipating share holders if the repurchase is done when the shares are under rated. Share repurchases also reduce the claim of the creditors in such a way that share repurchases want extra money that decreases the assets of the corporation and hence the claim of the creditors

5. Share repurchases explain the work of Jensen. Jensen analysis says, when companies produce considerable amount of funds which is not competently devoted due to less cost-effective opportunities for the company, extra money is returned to the share holders when company buyback shares. In such a situation, investors can make improved use of the funds as compared to the company.

6. Corporations buyback their shares for the purpose to increase earnings per share. The major motivation for a firm to repurchase its shares is that it boosts the earnings per share, the price of the share and the worth of managerial stock options (Goddard, 1999).

A buyback itself will not essentially boost a company's share price. Boost occurs more likely, if buyback is associated with selling of an underperforming subsidiary and basics of the business are sound. Buyback of shares, in US and UK, is the indicator of market undervaluation or returns of the extra cash flow. The Indian buybacks do not show this trend line. Although buyback is almost a decade old, the country has seen merely 140 buybacks and out of which 29 are either not permitted or reserved. The buyback is permitted as level playing field for business in India to prevent the cash of rich multinational companies from acquiring Indian undervalued companies. The business in India does not view buybacks as a substitute means of returning of cash flows. As an effect, the country has seen only a small number of buybacks (Mishra, 2005).

The off-market buybacks are superior to on-market buybacks when a corporation has gathered excess franking credits. It has been proved that the support to allocate these franking credits is the main incentive for the mission of taking off-market buyback in Australia. Underrated businesses favor on-market buybacks and the likelihood of picking an off-market buyback is positively associated to free cash flows and leverage (Brown and Norman, 2010).

Organizations' earnings and on-market share repurchase declarations are the devices that shift the prices of the shares high to raise the cash payout of the share option exercises. Since there is a constructive relationship between share price and buyback declarations, therefore, share repurchase declarations are, a less important gauge, used to manage market opinion and facilitate an executive with exercisable options to advantage from the constructive indication possessions linked with the statements (Balachandran, Chalmers, and Haman, 2008).

Share repurchases are not leading due to tri-model of lower quantity of buy backed shares, the greater figure of corporations understanding a defeat and elevated Price-Earnings Ratio (P/E) multiples. Buybacks have a superior occurrence and strength due to a U-turn in the three situations, being superior amount of shares bought, lesser event of defeat and minor P/E multiples. As a result, share repurchase are extra common with additional strength and have an improved accretive result on Earnings Per Shares (EPS) (Horan, 2012).

Open market stock repurchases provide stock price hold up and have slight price support influence on standards. Buybacks do offer price support but the results are not sufficient to detect the effect (Keswani, Yang, and Young, 2007). The important optimistic average returns on the declaration date show investors view that the occasion is measured as excellent information. Normally the business sample experiences 5.51% boost in share price on the day they decide to repurchase and the debt is proclaimed in the financial medium (Schaub, 2010).

Stock buybacks decrease market capitalization. By taking benefit of the incompetency of capital market, stock repurchases can constructively impact on stock price expansion. First, stock repurchases can get better the basics of a corporation in conditions of capital structure and technological special effects due to accumulation of EPS. Second, the stock repurchases influence investors' awareness by transferring encouraging indication to the market. Stock repurchases reveal organization's inspiration to return surplus money to stockholder's every time. Stock repurchases also indicate organization's tough self-assurance in the business prospects. The important concerns with respect to major factors of share buybacks behaviors; are amount computation, techniques of implementation, post repurchase plan, and outside announcement. Decisions regarding factors have to be made carefully in order to classify a reliable approach.

This is vital for creation of most excellent utilization of the above mentioned inefficiencies of the market and to assure that stock repurchase is a factual achievement (Wiemer and Diel, 2008).

Stock Prices:

Investor feeling is an important factor of investor recognition because the share prices are overstated by the pressure of investors' feeling. Other determinants of investor acknowledgment are index relationship, exchange listing, and analyst coverage. Research can inspect the level to which divergence in investor acknowledgment can be surfaced by these factors. In investigating the share price timetable over little investment horizons the study and forecasting of investor acknowledgment is a very significant feature. To offer a base for the survival of growth investors who decide securities by giving primary main concern to product innovation and increase potential is on value (Richardson, Sloan, and You, 2012). Important association linkages like, price of share and net asset value per stock, price of share and dividend proportion, and price of share and earnings per share of market returns, are studied for leasing banks and insurance firms of Dhaka Stock Exchange in Bangladesh.

Macroeconomic factors in the single industry are studied by Uddin (2009). Impact of exchange rate, interest rates, and their instabilities on share prices of banking industry of Pakistan is explored in some other studies. The outcomes of the investigation recommend the presence of vital indirect long run association between exchange rate and short term interest rate with share prices. Contrary, there is a constructive and main association between instabilities of exchange rate and interest rate with share prices. It is always advised that investors are supposed to buy banking sector shares if exchange rate and interest rates are unbalanced. The exchange rate and interest rate can be used as a pointer for investment choice that has to be made in banking sector shares (Jawaid and Haq, 2012).

Blume, Kraft, and Kraft (1977) find no association between money supply, percentage change in the money supply, and Moody's AAA corporate bond rate and common stock prices. If one considers that markets are competent then any effort to clarify share prices on the basis of present and past would be ineffective.

Kurihara and Nezu (2011) study association between the Japanese share prices and macroeconomic variables and find that interest rates have not exaggerated the Japanese share price. This outcome is opposite to conventional economic theory and other available readings where the exchange rate has exaggerated the Japanese share prices. Rate level has not affected the Japanese share prices. It has been found that not just the level is important but the rate is also important. Not just the interest rates and other macroeconomic variables have more influence but the U.S. share prices have more power on the Japanese share prices in contrast to the interest rates signifying a mutually dependent association between U.S share price and Japanese share price. Long-term stable relationship also exists between these variables.

There exists tremendously optimistic important connection between market price of the share and net asset value per share, market price of share dividend proportion, gross domestic product, and not a direct important association on price rise and lending interest rate but never all the time important at all years of Amman Stock Exchange in Jordan (Al-Shubiri, 2010).

The dividend policy measures have important force on the share price volatility. It is hence recommended that dividend policy has an impact on the stock price volatility and it gives confirmation encouraging the arbitrage recognition impacts, interval influence and knowledge influence in Pakistan. The influence of the dividend yield to share price volatility improved from 2003 to 2008. On the other hand, payout ratio is just a vital force at lower step of implication. Simply the mass and leverage have inverse and fewer important effects on share price instability. The results are reliable with the performance of upcoming share markets comparable to Pakistan (Nazir, Nawaz, Anwar, and Ahmed, 2010).

Numbers of economic, political and social variables have shown pressure on stock prices in Zimbabwe. Economic and political variables are acknowledged to be the major significant variables in shaping the share prices. Hence, it is concluded that in order to uphold the stock exchange the economic and political situation of the country should be stable (Sunde and Sanderson, 2009).

It is found that economic factors mainly interest rate and exchange rate and to a less extent gross domestic product, inflation and liquidity ratio impact stock prices change and have a major connection. In fact, there is always long term connection between stock price and economic factors. Economic strategy should be made to create suitable economic environment for the industry to expand and function helpfully to improve their share prices (Osamwonyi and Evbayiro-Osagie, 2012).

In Zimbabwe Stock Exchange, sixty listed firms are studied for the time period of 2001 to 2011. The experimental judgment is made on the connection between share price instability and dividend policy, following investigating size of the company, earning instability, leverage, and asset growth. Dividend policy procedures that include dividend yield and payout ratio have important influence on the stock price instability (Jecheche, 2012).

Stage of power is different for different sectors. In Energy and Metal sectors the stock price schedules are tremendously dependent on the company's internal factors. On the other hand, in Commerce sector, it is least dependent on internal factors. Stock prices of the transport and Metal products sectors are overvalued by the book value of the firms. Book value is considered as the main significant internal factor of the stock price movements for all sectors. The impact of other financial ratios differs for dissimilar sectors (Ergun, 2012).

Extremely constructive important association is found between market price of share and net asset value per stock, dividend fraction, gross domestic product. An unconstructive important association is found on inflation and lending interest rate but never forever important on at years 2005, 2006 and at all years of Amman Stock Exchange in Jordan.

Economic growth acts a major role in stock market expansion. It is significant to start strategy to promote growth and development as countries loosen their financial systems. The expansion of well-developed banking sector is significant for stock market growth in up- and-coming markets (Al-Shubiri, 2010). Rezaei, Fathi, and Alikhani (2012) find an important optimistic association between ROI and share price while no important association between gross profit margin and share price is found. Buyuksalvarci and Abdioglu (2010) find that previous share price notably effect current change in exchange rate and index of industrial production at 5% of significance. Further previous share price considerably impact current change in gold price, money supply and rate of inflation at 10% level of significance.

Stock Buyback and Stock Prices:

The US companies announced 4000 repurchases program amounting to $550 billion. Stock buyback are necessary corporate event when stock prices are higher managers buy fewer shares and when prices fall this causes an increase in the repurchase activity (Ikenberry, Lakonishok, and Vermaelen, 2000). French corporations buyback stocks at an inferior price to stabilize the price. Shares are repurchased after a visible turn down in share price. The results provide a little proof to sustain the information that executives make use of personal knowledge to buy back shares prior to the stock price increase (Hamon and Ginglinger, 2003).

Share buyback and dividend announcements in the market right away indicate an increasing flow in the stock price changes. However such optimistic indication survived just for one day following the announcements. Following that the degree of constructiveness of shares started lessening. The market response to declaration like share buyback and dividends is finished in one or two days, therefore, if management perceives that the announcement has worked to their benefit in addition to the rise in price of the shares they would have accomplished their major aim of enhancing shareholder worth (Thirumalvalavan and Sunitha, 2006).

Stock buyback announcements create a considerably constructive reaction from the market and the special impacts of buyback declaration differ across the industries. The impact on financial industry is the maximum while the impact on the electronics industry is the minimum usually. The corporations which acknowledge a superior turn down in share price previously to buyback declaration, are keener to repurchase their shares. The outcomes are unsuccessful to hold up that, the superior the percentage of shares buy backed is, the stronger is the declaration repurchasing impact (Lin, Lin, and Liu, 2011).

In UK, operating income is the key motivation of stock buybacks and no other factor causing important impact on the entire worth or proportion of stock buybacks. Expected income is considerably optimistically associated to stock buybacks (Benhamouda and Watson, 2010). There is always a constructive market answer with buyback announcements in case of the Indian stock market. The study discloses that the information concerning the corporate announcements of buybacks is absorbed rapidly into the share prices and has a computable impact on the stock price performance of the stocks (Chavali and Shemeem, 2011).

Over the past twenty-five years a large number of researches have indicated the impact of stock repurchases on share prices. These studies are all declarations of repurchase authorizations and not declarations of buyback completions. In spite of the repurchase method, stock prices boost on regular in response to the buyback declarations. Stock buybacks have become a significant occurrence not just in the United States but all over the world. Further it is also found that managers are impressed by the immense worldwide confirmation that stock buybacks cause share prices to raise in spite of the buyback procedures. This rise in the share price is practical not just in the short run but astonishingly in the long-run in spite of different buyback procedures, in other countries where there is sufficient information to do long run researches like in United States, Canada, and the United Kingdom.

Even though there are many other factors that increase the share price and such variables are tax savings or perhaps a number of wealth relocated from bondholders, the proof is mainly reliable with the analysis that markets believe a buyback as an optimistic indication (Vermaelen, 2005).

Problem Statement:

Companies often buy back their own stocks to reduce the equity of firm or ownership. Managers buy back shares when share prices are low and share prices go up after share buybacks. There is a need to study the impact of stock buyback on stock prices and behavior of share prices after share buybacks, so that companies may know how stock buybacks and share prices influence each other and how is it beneficial for the firm? This study aims to examine the two-way impact between stock buybacks and stock prices.

Hypotheses:

H1: Stock buybacks affect the stock prices. H2: Stock prices affect the stock buybacks.

Methodology

Sample

The sample includes 10 multinational companies. The 10 years' buybacks history and stock prices are included. The 10 multinational companies include:

1. Coca cola

2. Pepsi

3. MacDonald's

4. Proctor and gamble

5. Unilever

6. IBM

7. Microsoft

8. HP

9. Toyota

10. Honda

Procedure

The financial data include the 10 years' buyback history and historic share prices ranging from the year 2002 to 2012. General Linear Model (GLM) and Univariate analysis is used analyze the two-way impact between stock buybacks and share prices. SPSS (statistical package for social sciences) is used to analyze the data. In case of buybacks dependent, we have put the buybacks as dependent variable, company and month in fixed factors and stock prices and lags in the covariates. In case of stock price dependent, we have put the stock price as dependent variables company and month in fixed factors and buybacks and lags in the covariates.

Analysis and Discussion

Buyback as Dependent Variable

Buybacks = intercept + ai (company) + bi(month) + yi(avgsti)

Table 1: Tests of Between-subjects Effects

###Dependent Variable: buybacks (Millions)

###Source###Type III Sum of Squares###df###Mean Square###F###Sig.

###Model###5.655E8###29###1.950E7###37.939###.000

###company###1.219E7###9###1354787.640###2.636###.005

Month Numeric###1.161E7###11###1055769.489###2.054###.021

###avgsto_1###4442964.821###1###4442964.821###8.644###.003

###avgsto_10###3143272.555###1###3143272.555###6.116###.014

###buybac_1###3566213.013###1###3566213.013###6.939###.009

###buybac_2###3430425.709###1###3430425.709###6.674###.010

###buybac_3###3.717E7###1###3.717E7###72.317###.000

###buybac_6###1983108.122###1###1983108.122###3.858###.050

###buybac_9###1.683E7###1###1.683E7###32.754###.000

buybac_12###1.594E7###1###1.594E7###31.016###.000

###Error###5.191E8###1010###513971.540

###Total###1.085E9###1039

In case of buybacks dependent companies and months have a significant impact on buybacks. Stock price at lag1 and lag10 also have a significant impact on buybacks. Buybacks at lag1; lag2, lag3, lag6, lag9 and lag12 have significant impact on buybacks.

Table 2: Parameter Estimates

###Dependent Variable:buybacks (Millions)

###95% Confidence Interval

###Std.

###Parameter###B###t###Sig.###Lower###Upper

###Error

###Bound###Bound

###[company=Coca Cola] 26.012 131.940 .197###.844###-232.896###284.919

###[company=Honda]###-10.189 115.143 -.088###.930###-236.136###215.757

###[company=HP]###199.496 120.500 1.656###.098###-36.964###435.956

###[company=IBM]###260.493 204.278 1.275###.203###-140.365###661.351

[company=McDonalds]###23.686 129.271 .183###.855###-229.984###277.356

###[company=Microsoft] 374.657 119.050 3.147###.002###141.044###608.271

###[company=P and Gamb] 276.939 153.948 1.799###.072###-25.155###579.033

###[company=Pepsi]###49.477 142.400 .347###.728###-229.956###328.910

###[company=Toyota] -33.124 172.989 -.191###.848###-372.584###306.335

###[company=UL]###14.109 117.043 .121###.904###-215.566###243.784

###[MonthNumeric=1.00] -75.249 112.122 -.671###.502###-295.267###144.769

###[MonthNumeric=2.00]-107.281 112.680 -.952###.341###-328.394###113.832

###[MonthNumeric=3.00] 168.491 108.769 1.549###.122###-44.948###381.930

###[MonthNumeric=4.00] -53.718 113.545 -.473###.636###-276.530###169.093

###[MonthNumeric=5.00] -95.003 114.393 -.830###.406###-319.479###129.473

###[MonthNumeric=6.00] 287.043 108.741 2.640###.008###73.659###500.427

###[MonthNumeric=7.00] -27.591 113.213 -.244###.808###-249.750###194.569

###[MonthNumeric=8.00] -82.657 113.445 -.729###.466###-305.272###139.958

###[MonthNumeric=9.00] 98.790 108.085 .914###.361###-113.307###310.888

[MonthNumeric=10.00] -54.377 111.948 -.486###.627###-274.055###165.301

[MonthNumeric=11.00] -85.512 112.414 -.761###.447###-306.104###135.079

[MonthNumeric=12.00]###0a###.###.###.###.###.

###avgsto_1###6.280 2.136 2.940###.003###2.089###10.472

###avgsto_10###-5.692 2.302 -2.473###.014###-10.208###-1.175

###buybac_1###-.073###.028 -2.634###.009###-.127###-.019

###buybac_2###-.072###.028 -2.583###.010###-.126###-.017

###buybac_3###.260###.031 8.504###.000###.200###.319

###buybac_6###.061###.031 1.964###.050###6.119E-5###.122

###buybac_9###.178###.031 5.723###.000###.117###.240

###buybac_12###.172###.031 5.569###.000###.112###.233

Table 2 highlights that Microsoft has the highest beta value showing that it is having the highest buybacks. Proctor and gamble has the second highest beta value and IBM has the third highest beta value. The lowest beta value is for Toyota that means it has the lowest number of buybacks. The second lowest beta value is for Honda.

As far as months are concerned companies' buyback more in the month of June as it has the highest beta value of 287.043. The lowest number of buybacks is in the month of February. The stock prices of the previous months also effect the buyback value that is high is the average stock price in the previous months higher is the buyback value. The average stock price of 10 months back also affects the value of buyback in the present month but it is having the negative impact that high the stock price, lower the buyback value of the present month. The buybacks of the previous month also have influence on the present month buybacks but in the negative manner that is lower the buyback value of the previous month, high the value of buybacks in present month. Buyback of 12 months back have the positive impact on the buybacks of present month.

Buybacks lag 3; lag 6, lag 9 and lag 12 have positive impact on present buybacks. This means company's buyback is affected by the buybacks occurred at the end of the quarter previously.

Stock Price as Dependent Variable

Stock Price = intercept + ai (company) + bi(month) + yi(buybacki)

Table 3: Tests of Between-subjects Effects

###Dependent Variable: avg stock price

###Type III Sum###Mean

###Source###df###F###Sig.

###of Squares###Square

###Model###4.183E6###16###261445.463###17907.025###.000

Month Numeric###374.856###12###31.238###2.140###.013

###avgsto_1###81601.950###1###81601.950###5589.113###.000

###avgsto_6###129.127###1###129.127###8.844###.003

###avgsto_7###133.555###1###133.555###9.148###.003

###buybac_5###62.901###1###62.901###4.308###.038

###Error###15665.973###1073###14.600

###Total###4198793.388###1089

In case of stock price dependent, stock price lag1, lag6, lag7, and buyback lag5 are affecting the present stock prices. Companies' effect is insignificant; it means stock price behavior is the same across the companies.

Table 4: Parameter Estimates

###Dependent Variable: stock Prices

###95% Confidence Interval

###Std.

###Parameter###B###t###Sig.###Lower###Upper

###Error

###Bound###Bound

[MonthNumeric=1.00]###.040###.448###.089###.929###-.839###.919

[MonthNumeric=2.00]###.089###.455###.196###.844###-.803###.982

[MonthNumeric=3.00]###-.656###.445###-1.474###.141###-1.530###.217

[MonthNumeric=4.00]###.813###.447###1.821###.069###-.063###1.689

[MonthNumeric=5.00]###.453###.456###.994###.321###-.441###1.346

[MonthNumeric=6.00]###-.692###.450###-1.537###.125###-1.575###.191

[MonthNumeric=7.00]###-.164###.449###-.365###.715###-1.045###.717

[MonthNumeric=8.00]###.221###.461###.478###.632###-.684###1.125

[MonthNumeric=9.00]###.324###.449###.720###.472###-.558###1.206

[MonthNumeric=10.00]###-.608###.449###-1.353###.176###-1.490###.274

[MonthNumeric=11.00]###1.218###.466###2.612###.009###.303###2.134

[MonthNumeric=12.00]###.846###.451###1.877###.061###-.039###1.731

###avgsto_1###1.011###.014###74.760###.000###.984###1.037

###avgsto_6###-.100###.034###-2.974###.003###-.166###-.034

###avgsto_7###.093###.031###3.024###.003###.033###.153

###buybac_5###.000###.000###-2.076###.038###.000###-1.507E-5

The highest stock prices are in the month of December. The second highest stock prices are in the month of April. The lowest stock prices are in the month of June. The stock prices of previous month also effect the stock price of the current month and has a positive influence such that higher the stock price of the previous month higher the stock price of the current month will be Six months back average stock price also affects the stock price of the current month but has a negative impact. 5 months' previous buybacks have negative impact on the stock price of current month.

Conclusion and Recommendations

Conclusion

For the first model where we take buybacks as dependent variable, companies and months have significant impact on buybacks, it means behavior of buybacks is different across the companies and across the months. Microsoft, P and G, and IBM are three top companies respectively, which buyback their shares in abundance. Shares are bought back at the end of every quarter but usually end of the second quarter, the tendency of share buybacks is very high. Moreover, stock prices along with lag1 and lag10 and lag1, lag2, lag3, lag6, lag9 and lag12 for buybacks are also found significant. Stock price lag1 and lag10 have positive and negative impact on share buybacks respectively. Buyback lag1, lag2 and lag3 have negative impact and lag6, lag9 and lag12 have positive impact on share buybacks. The value of adjusted R square is 50.8% (See Table 1 and Table 2).

For the second model where we take stock price as dependent variable, company effect is found insignificant while month effect is found significant. Stock prices are observed high in the beginning of the second quarter and at the end of the last quarter, especially in the month of November and December. Other significant predictors of this model are stock price lag1, lag6, lag7 and buyback lag5 have significant impact on stock price. Stock price lag1 and lag7 have positive impact on stock price while lag6 has negative impact. Buybacks lag5 has slightly positive impact on stock price. The value of adjusted R square is 99.6 %.

Recommendations

To keep the stock price stable in the market, share buybacks activity at the mid of every quarter is ideal to be considered, because the prices are low at the end of first two quarters and high at the end of last two quarters. Buybacks should be high in February and May while buybacks should be low in August and November. Buying is ideal in the first half of the year while selling is ideal in the last half of the year. Investors must keep in mind the behavior of share buybacks of the companies before investing in the stock market (See Table 3 and Table 4).

Limitation and Scope of Research

The study is limited to only 10 multinational companies. The study focuses on two-way impact between stock buybacks and stock prices. The research is beneficial to the managers, public companies, stock holders and various stake holders.

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