Stock Price Reaction to Announcements of Right Issues and Debenture Issues: Evidence from Colombo Stock Exchange

Authors

  • Udani Chathurika Edirisinghe Sabaragamuwa University of Sri Lanka
  • P D Nimal University of Sri Jayewardenepura, Sri Lanka

DOI:

https://doi.org/10.18533/ijbsr.v5i2.717

Keywords:

Abnormal returns, debenture issue, event study, right issue.

Abstract

This study investigates the stock market reaction for right issues and debenture issues of Colombo Stock Exchange (CSE) during the period of 2005 to 2011 while providing evidence for the research question “how do stock prices react to the debt and equity issue announcements of listed companies in CSE?” In investigating the ex-ante and ex-post market reactions the study employees event study methodology, while predicting abnormal returns, based on three alternative normal/expected returns modeling methods, namely Mean Adjusted Model, Market Adjusted Model, and Capital Asset Pricing Model. When testing the alternative hypothesis, whether stock prices significantly reacts to the announcement of right & debenture issues, results of all models show positive market reaction during the 30 days prior to the announcement and react negatively from 2 days after the announcements for right issues, but for debenture issues market reacted negatively during the period prior to debenture issues and continue to do the same during the post event period. Although the magnitude and significance of abnormal return generated through three alternatives methods differ, the pattern of the CAAR of all models are similar. Thus, as far as the speed of the price adjustment is concerned it seems that the CSE is not efficient.

Author Biography

  • Udani Chathurika Edirisinghe, Sabaragamuwa University of Sri Lanka

    Udani Chathurika Edirisinghe is a Lecturer attached to Department of Accountancy and Finance, Faculty of Management Studies, Sabaragamuwa University of Sri Lanka. She completed her Bachelor of Business Administration Degree (specializing in Finance) from University of Colombo and also a CIMA(UK) passed finalist. After her first degree she continued her postgraduate studies at Jayewardenepura University of Sri Lanka and completed the M.Sc in Management. Her main research interest is in the field of finance. You can contact her at chathurikaedirisinghe@gmail.com

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Published

2015-02-28

Issue

Vol. 5 No. 2 (2015): February

Section

Article

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