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

Author

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  • Edirisinghe U. C

    (Department of Accountancy & Finance, Sabaragamuwa University of Sri Lanka.)

  • Nimal P.D

    (Department of Finance, University of Sri Jayewardenepura, Sri Lanka)

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.

Suggested Citation

  • Edirisinghe U. C & Nimal P.D, 2015. "Stock Price Reaction to Announcements of Right Issues and Debenture Issues: Evidence from Colombo Stock Exchange," International Journal of Business and Social Research, LAR Center Press, vol. 5(2), pages 67-76, February.
    • Handle: RePEc:lrc:larijb:v:5:y:2015:i:2:p:67-76
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    References listed on IDEAS

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    More about this item

    Keywords

    Abnormal returns; debenture issue; event study; right issue.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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