chapter i introduction and design of the...
Post on 24-Aug-2020
7 Views
Preview:
TRANSCRIPT
CHAPTER – I
INTRODUCTION AND DESIGN OF THE STUDY
1.1. INTRODUCTION
The financial sector in India has undergone many reforms, particularly in the
capital market segment, since 1990s. A functioning stock market is an essential
component in a competitive economy, as it provides a mechanism for allocating the
economy capital stock. In an ideal situation, the stock market will maximize the total
utility of the economy. The share price fluctuations in the market can affect the
economy of the nation. A fluctuation occurs in the price level of stock because of
changes in several factors, like economical, social and political. Apart from these
factors information released by the corporate bodies causes volatile nature in share
prices. However, the corporate announcement has considerable impact on the share
price movements. Moreover, the individual investors change their investment pattern
depending upon the release of information by the corporate bodies. In other words,
the corporate announcements reflect wide variations in the share prices and investors‟
behavioural pattern. This fact is brought into the companies regularly making
significant announcement with positive and negative information which will reflect
in their share prices. When corporate announcements contain good news, the stock
prices go up, whereas announcements containing bad news push the stock price
down. Given this reality, the investor can react positively or negatively depending
upon whether it is positive or negative information. Hence the market reactions
indicate that the known information is immediately discussed by all investors and it
reflects in share prices in the stock market. The information that affects the prices of
securities are, strikes, lockouts, joint venture agreements, launching of new products,
financial reports include annual and quarterly releases, press releases, declaration
of dividend including interim dividend, outcome of board of directors meeting,
outcome of annual general meeting, rights issue, bonus issue, allotment of equity
shares including allotment of shares under employee stock option scheme,
amalgamation, acquisition, buy-back offer and sale of shares etc. Among these
various corporate announcements giving information, some are likely to be having
most significant impact on the share price fluctuation. It is obvious that prices play a
2
key role in a stock market, as investors‟ allocation decision will depend on the prices
of the traded stocks. Fama1 articulates the ideal of a well functioning stock market as
follows:
“In general terms, the perfect is a market in which prices provide precise
signals for resource allocation: that is, a market in which firms can make production-
investment decisions, and investors can choose among the securities that represent
ownership of firms‟ activities under the assumption that security prices at any time
„fully reflect‟ all available information”.
The statement that, “assumption that security prices at any time „fully reflect‟
all available information” refers to the investors who are concerned with the question
of whether prices are reasonable or not. The only way for investors to determine the
fairness of prices is to utilize available information in order to try to establish the
intrinsic value of the traded stocks. The point that Fama emphasizes, however, is that
the potential investors do not need to be afraid about whether prices are fair or not if
they can assume that prices already “fully reflect” all available information.
Therefore, if informed traders are likely to trade on valuable private
information in the period leading up to dividend announcements, the study expects
market liquidity to be low preceding the event. However, low liquidity might only
occur when the timing of the dividend announcement is known in advance (i.e.,
anticipated). When the timing of the dividend announcement is unknown (i.e.,
unanticipated), uninformed investors will, by definition, trade normally before the
event. In contrast, informed investors might exploit their superior information before
the event, unless they are barred from doing so for legal reasons. If the informed do
not trade before unanticipated announcements, or if they mask their trades
sufficiently that the market maker does not detect their trades, market liquidity will
appear normal although volume might be higher. In contrast, if the informed trade on
their valuable information and the market maker is aware of and reacts to this trading
activity, market liquidity will deteriorate before unanticipated events. The traditional
models assume that the announcement reduces informational asymmetry between the
informed and uninformed. Thus, spreads should return to normal soon after the new
information is processed by the market. In standard asymmetric information models,
3
at the time of the event, price volatility increases with the amount of new information
impounded into market prices, representing the revision in investors‟ beliefs.
However, as soon as the new information is impounded, volatility should decline
because informational asymmetry has declined.
The impact of security prices to the release of different information: Beaver
(1968)2, Foster (1981)
3, Beaver, Clarke and Wright (1979)
4 made some of the studies
which find significant reaction in the security prices to the release of corporate events
and announcement of information. Another finding of these studies is that during the
announcement period, there are abnormal returns. On the Indian stock market, M.
Obaidullah (1992)5, R.Srinivasan, (1997)
6, Jijo Lukose and Narayan Rao (2002)
7
made some of the studies which have tested the efficiency of the Indian stock market
with respect to corporate events and dividend announcement, bonus announcement,
rights issue, merger and acquisition, stock splits etc. A few Indian studies have tested
the efficiency of the Indian stock market with respect to information content of stock
split announcement. Further, these studies could not find out the exact period during
which the market reacts to a information of price changes (Raja.M, Clement.J
Sudhakar and Selvam.M, 2009)8. With this in mind, the objective of this study is to
explore the impact of corporate announcements on security price reactions.
Furthermore, the study also examines the individual investor‟s behaviour in terms of
corporate announcement surprises which may be caused by information releases.
1.2. CORPORATE ANNOUNCEMENT
It is a significant piece of news given to the public by corporate bodies. For
example, if a company declares dividend, the announcement occurs when the day the
news is given to the media to report to the public. As the announcement may affect
the companies‟ stock price, many analysts observe stock performance on the
announcement date and consider it is a gauge of how the market will treat the news.
This undeniable reality is brought out from every day the financial markets react to
announcements not only from individual firms but also from the market events.
When corporate bodies report good news, stock prices go up, whereas
announcements that contain bad news push the stock price down. Given this veracity,
the investor who is able to gain access to information prior to it reaching the market
4
can buy or sell ahead of the information. In particular, the corporate announcements
contain new information about the current and future expected profitability and
growth prospects of the firm.
The corporate entities express their operating and financial performance,
growth and prospects activities by way of several information like, financial results
including First Quarter (Q1), Second Quarter (Q2), Third Quarter (Q3), and Fourth
Quarter (Q4) or final, dividend including interim dividend, Allotment of equity shares
including Employee Stock Option Scheme/Plan (ESOS), Merger and Acquisition,
Bonus and Rights issue, and press/media releases. The content of announcements
may differ from one corporate entity to another depending on the sectors. This would
lead to know about the firm by the investors and it has more advantage to the
investors, who can execute their investment decisions based on the importance of
announcements. Thus, the corporate announcements play a vital role in the
investment behavioural pattern of the individual investors. The changes in investors‟
investment behavioural pattern on the basis of corporate announcement followed by
the share market have a significant role in the share price reactions.
1.3. SHARE PRICE MOVEMENTS
A share price is the price of a single share of a company's stock. Once the
stock is purchased, the owner becomes a shareholder of the company which issued
the share. Stock price movement, by definition, is driven by revisions of expected
future cash flows and or of expected discount rates. Stock price changes every day as
a result of market forces. Do waves of market-wide optimism or pessimism, or
investor sentiment, influence the stock market response to firm specific news? The
vast number of event studies published over the past decades in the areas of finance,
accounting, law and economics have largely ignored this question.
An event study typically pools together events that occur during boom times
with events that occur during bear periods. Tests are then conducted, for instance, to
quantify the impact of various corporate events on the fundamental value of the firm.
The implicit assumption therein is that the stock price reaction to corporate
announcement is independent of the current optimistic or pessimistic state of the
5
market. If more people want to buy a stock (demand) than to sell it (supply), then the
price level goes up. Conversely, if more people want to sell a stock than to buy it,
there would be greater supply than demand, and the price would fall; what‟s difficult
to comprehend is what makes people like a particular stock and dislike another stock.
This comes down to figuring out what news is positive for a company and what news
is negative. Thus, the volatility of share prices around several corporate
announcement dates provides an indication of the changes in share prices before and
after the corporate announcements. Whenever the information is released to the
public, it signals to the market that their share price may react or may not react in the
securities. The investors respond differently to several types of announcements by
the corporate entities. The investor may react positively or negatively to corporate
announcements as it is revealed in the share prices. The positive reaction from the
investors implies uptrend in the market and negative from the investors implies
downtrend in the market. However, it would reflect the changes in the security
prices.
In an efficient market, prices respond instantaneously to new and material
information and fully reflect the information. Delayed responses (under-reaction) and
overreaction to new information would suggest that markets are inefficient. A price
of securities in the capital market moves whenever there is trading among investors.
In general, trading volumes will be affected by the flow of information to the capital
market. Whenever there is new information, market participants will react swiftly to
the latest available information. There are three major reactions in efficient and
inefficient market as stated below:
1.3.1. Immediate price adjustment - When there is new information in an efficient
market, security prices will respond immediately/adjust/reflect rapidly. There is no
tendency for subsequent increase and decrease.
1.3.2. Reaction delayed - A new piece of information will make security prices to
adjust gradually. For example, when there is new information, a security need
twenty one days period of lapse period before the price fully reflects the new
information.
6
1.3.3. - Reaction overreacted: The new available information causes the price of the
security to be over adjusted. Normally, this reaction is characterized by a bubble.
Due to their nature, corporate actions are likely to have the most significant impact
on share prices and the trading activity of firms‟ securities on the announcement day.
For example, corporate announcements often alter firms‟ future cash flows, and
provide new signals about their profitability and changes in financing structure.
Furthermore, some corporate announcement types can affect the value of firms
indirectly for example, by altering trading costs in the secondary markets. The results
documented in this report confirm that corporate announcement often have
significant implications for share prices and trading activity, and provide evidence on
the diversity of these implications, depending on the corporate announcement type.
The overall objective of this research project is to examine the ways in which
accurate and timely corporate announcement information could benefit financial
organizations and their customers by improving the effectiveness of their trading
strategy and quality of advice offered to their clients. For example, investors might
use corporate announcement to develop strategies that make use of predictable
movements in share prices, or take advantage of the ability to predict changes in
share price volatility. At the same time, predictable movements in trading activity are
likely to provide greater understanding of the trading liquidity that investors can
expect to observe on a given day.
1.4. INVESTOR’S BEHAVIOUR
An individual investor who makes investments in his own name and can act
on behalf of others, for example, stock brokers or mutual fund managers make
investments for others or else an investor can make investments for ones own
personal account. An individual investor is a person who manages his/her own
money in order to achieve personal financial goals. Individual investor who consider
investing in individual stock have a lot of information to process; they are bombarded
with a flood of information, some of which might be relevant for their decisions,
some of which might be not perhaps instead of trying to obtain that information,
people simply follow their gut-feelings or a fad and are thus “behavioural” trader.
Theoretical research as well as empirical evidence offer mixed results regarding
7
individual investor trading strategies and motives behind them. Empirical
investigations into individual investor behaviour have thus focused on analyses of
data.
This study is able to gather detailed data on individual investors‟ investment
behavioural pattern. This is the main motivation behind the study. The other driving
force behind the study was the need to advance the motives for trading by
individuals, particularly concerning the utilisation and responsiveness to information.
This study was conducted on experimental basis necessary to directly examine the
relationship between individual investors‟ investment behavioural pattern and
corporate announcement. As these issues are of particular importance in financial
markets – this study is to investigate directly the relevant decision processes.
1.5. CORPORATE ANNOUNCEMENTS, SHARE PRICES AND
INVESTORS’ BEHAVIOUR
The initiation of corporate announcement may have significant implications
on the financial risks of market participants. These effects can be explained by the
„economic nature‟ of corporate announcement. In particular, corporate announcement
often contains new information about the current and expected profitability and
growth prospects of firms, or they can result in changes in firms‟ operations and
financial structure. At the same time, corporate announcement can constitute a
transfer of wealth between shareholders and bondholders, alter trading costs in
secondary markets, and have other direct and indirect effects on a firm‟s value. In
this study, the effects of corporate announcements associated with announcement
dates are analysed using three measures.
1.5.1 Share price returns – Share price returns around on announcement dates
provide evidence on the extent to which the particular corporate announcement type
is associated with a positive or negative share price effect on the specific dates in the
corporate announcement.
1.5.2. Share price return volatility – Estimation of return volatility on
announcement dates provides an indication of the changes in return characteristics
and potential risks around specific dates in the media release information.
8
1.5.3. Trading velocity – estimation of trading velocity (trading activity or trading
volume) on announcement dates provides an indication of the extent to which
corporate announcement alter investor behaviour and thereby, among other effects,
changing the level of liquidity that investors may experience in the secondary market.
These three facets of „market conditions‟ during the corporate announcement
may have significant implications for the profitability of certain trading strategies,
and the intermediaries‟ supply of trading services to their clients. Therefore, accurate
and timely corporate information that is available in a user-friendly format might
give financial intermediaries and investors an informational advantage that would
improve their trading strategies and reduce risks associated with corporate
announcements. The investigation of the precise mechanics of how this information
could be used by the intermediaries, however, is beyond the scope of this study.
In an efficient market, security prices at any given time fully reflect all
available information. A prior, there is good reason to believe that stock markets are
efficient because such markets are exemplary examples of competition. Nevertheless,
rather than adjusting immediately to new surprises, stock prices tend to drift over
time in the same direction as the initial surprises. This phenomenon is labeled as
earnings-momentum or Post-Earnings Announcement Drift (PEAD) and researchers
have provided three explanations for its existence and persistence. First, that
announcements with unexpectedly high (low) earnings make investing in these firms
more (less) risky, so the drift can be explained as a risk premium. Second, the
persistence of this anomaly can be due to high transaction costs (limits of arbitrage).
Third, the drift is a function of the type of information that the agents receive. The
behavioural theory posed by Daniel et al. (1998)9 emphasizes the distinction between
public and private information. In particular, the authors predict that investors will
under-react to public information and overreact to private information. The rational
structural uncertainty theories, on the other hand, argue that the distribution of
information in the economy is what matters. These theories predict that a high (low)
arrival rate of informed traders is associated with low (high) structural uncertainty
and hence low (high) drift.
9
1.6. STATEMENT OF THE PROBLEM
The small and medium investors are motivated when their savings and
investments in the market are anticipated and appropriately valued. The corporate
announcements and their disseminations determined the efficiency of the stock
market. Hence, in this concern how quickly and correctly security prices react to this
corporate announcement show the efficiency of the stock market. In India very few
studies have been conducted to test the efficiency of stock market with respect to
corporate announcements. This situation raises the following questions:
1. What is the role of corporate announcements on individual investors‟
investment behavioural pattern?
2. Whether the individual investors do actually take into account
contemporaneous information when making their trading decisions?
3. What type of corporate announcement has more influence on the
investor‟s investment behavioural pattern?
In order to answer these questions, the study aimed to analyse the share price
reactions and individual investor‟s investment behaviourual pattern on the corporate
announcement of 30 listed companies of Bombay Stock Exchange.
1.7. OBJECTIVES OF THE STUDY
The information made by the corporate bodies might have significant impact
on the security prices and the investors‟ behavioural pattern. However, the
information received by the investors‟ under-react or over-react depends on the
corporate announcement type, this would imply that the stock market as a whole will
also under-react or over-react to corporate information. This logically follows
because only stocks with considerable uncertainty or slow information diffusion may
exhibit the under – and or over- reaction patterns predicted by the behavioural
models. Motivated by this observation, the objectives of the study inter-alia are;
1. To study the various important corporate announcements of Bombay
Stock Exchange listed companies.
2. To identify the impact of corporate announcements on security prices and
3. To evaluate the impact of corporate announcements on individual
investors‟ investment behavioural pattern.
10
1.8. HYPOTHESIS OF THE STUDY
The empirical evidence on security price reactions and individual investor‟s
investment behavioural pattern to corporate announcements has inspired researchers
to develop theories to explain seemingly abnormal results, thus contributing to a
better understanding of the phenomenon of capital markets. The study has proposed
hypothesis to explain security price reactions and individual investor‟s investment
behavioural pattern. These may fall into two categories:
H1: Corporate announcement has no significant impact on security price
reaction.
H2: Corporate announcements have no significant impact on the
individual investor‟s investment behavioural pattern.
To test the hypothesis, the event window is used before and after the
announcements by corporate entities, in order to carry out an analytical study to
determine the relationship between share price reactions and announcements made by
the corporate entities. Moreover, the study used the opinion survey through survey
method to find out the association between individual investor‟s investment
behaviour and corporate announcements.
1.9. SIGNIFICANCE OF THE STUDY
The study empirically evaluates the informal efficiency of stock market with
regard to the corporate announcements of 30 listed companies (Bombay Stock
Exchange). The significance of the study is that the investors can make use of
valuation of securities for corporate event announcement information. Corporate
event announcement information and stock market informal efficiency are of greater
interest to the investors, fund managers, policy makers, market regulators,
Government, researcher and the public. The present study is an attempt to test the
informal efficiency of stock market with respect to corporate announcement of
Bombay Stock Exchanges‟ listed companies.
11
1.10. SCOPE OF THE STUDY
The notion that the corporate announcement might have strong implications
on share prices and investor behaviour is in general accepted by practitioners.
However, this belief is usually founded on observations related to the most visible
corporate announcement types. For example, significant share price volatility
following announcements of mergers or takeovers is well documented in both the
academic literature and popular press. The aim of this study is to consider the broader
range of corporate announcement types, and to seek evidence on whether the share
price and trading activity effects can be observed in this wider spectrum, and whether
these effects go beyond the announcement date. The study provides assessment of the
following corporate announcements namely, financial results including First Quarter
(Q1), Second Quarter (Q2), Third Quarter (Q3), and Fourth Quarter (Q4) or final,
dividend including interim dividend, Allotment of equity shares including Employee
Stock Option Scheme/Plan (ESOS), Merger and Acquisition, Bonus and Rights issue,
and Press/Media releases.
The present study tests the informal efficiency of stock market in the semi-
strong form of Efficient Market Hypothesis (EMH). For each corporate
announcement type, the analysis is based on corporate announcement events for one
year, from 1st April 2008 to 31
st March 2009. The study was restricted to corporate
announcement by the Bombay Stock Exchange listed companies during the period of
study. Further, the study did not cover the remaining information in the stock market.
It evaluates of the individual investors‟ investment behavioural pattern in Tamil
Nadu.
1.11. OPERATIONAL DEFINITIONS
1.11.1. Investment - Investment refers to the buying of a financial product or any
valued item with anticipation that positive returns will be received in the future.
1.11.2. Investor - A person who invests capital in order to gain financial returns.
1.11.3. Individual Investors - An individual who purchases small amounts of
securities for him/himself, as opposed to an institutional investors and also called as
retail investor or small investor.
12
1.11.4. Well-informed investors - The investors who are rational are called well
informed investors. The investors, who have thorough understanding about the stock
market condition, make necessary analysis before going to invest in securities and
have understood the relationship between risk and returns and the significance of
corporate announcement are the well-informed investors.
1.11.5. Investor Behaviour - The decisions of investors by viewing information
structure and the characteristics of market and rationally or irrationally outcomes for
their self interest.
1.11.6. Corporate Announcements - An announcement made by the corporate
entities through a public statement containing information about an event that has
happened or is going to happen.
1.11.7. Security Price - A security price is the price of a single share of a company‟s
stock. Once the stock is purchased, the owner becomes a shareholder of the company
that issued the share.
1.11.8. Event Study - An event study is an empirical study of prices of an asset just
before and after some event, like an announcement, merger, or dividend.
1.11.9. Actual Return - Actual return is what investors actually receive from their
investments.
1.11.10. Expected Return - The expected return is the estimated return based on an
asset pricing model, using a long run historical average or multiple valuations.
1.11.11. Abnormal Return - Abnormal return mean the return to a portfolio in
excess of the return to a market portfolio.
1.11.12. Announcement Date - The announcement date is the first day the public
will receive the information regarding the events from the company.
I.11.13. Depository Participants - A Depository Participants (DPs) is described as
an agent of the depository. They are the intermediaries between the depository and
the investors. The relationship between the DPs and the depository is governed by an
agreement made between the two under the Depositories Act.
13
1.12. METHODOLOGY
The study is both descriptive and analytical in nature. The study identifies the
impact of corporate announcement in share price reactions and individual investors‟
investment behavioural pattern. For this purpose, the standard methodology used to
evaluate the reaction of share prices to corporate announcement is an event study,
which was employed as early as Fama, Fisher, Jenshan and Roll. (1969)10
and Brown
and Warner (1985)11
. Event studies have been employed in much research and their
sophistication has been greatly improved. The events defined for this study were the
announcement of corporate bodies. The announcement date was considered as event
date. The study was using primary and secondary data. The instrument used to collect
primary data was questionnaire schedule and secondary data was collected from
various websites, journals, magazines, newspapers etc. The study follows personal
interview as the tool of survey using a questionnaire schedule.
In order to find out the main objective of the study, i.e., to examine the impact
of corporate announcement on reactions of security prices, the corporate
announcement dates were identified and used. The types of corporate announcements
are financial results including First Quarter (Q1), Second Quarter (Q2), Third Quarter
(Q3), and Fourth Quarter (Q4) or final, dividend including interim dividend, Bonus
and Rights issue, Merger and Acquisition, allotment of equity shares including
Employee Stock Option Scheme/Plan (ESOS), and Press/Media releases. The
population of the study is the corporate announcement of financial results, dividend,
bonus and rights issue, merger and acquisition, allotment of shares and press/media
release for 30 companies listed on the Bombay Stock Exchange during the year from
1st April 2008 to 31
st March 2009, namely, Associated Cement Company Ltd. (ACC),
Bharat Heavy Electronics Ltd. (BHEL), Bharti Airtel Ltd., DLF, Grasim Industries Ltd.,
Housing Development Finance Corporation Ltd. (HDFC), HDFC Bank Ltd., Hindalco
Industries Ltd., Hindustan Unilever Ltd. (HUL), ICICI Bank Ltd., Infosys Technologies Ltd.,
India Tobacco Company Ltd.(ITC), Jaiprakash Associates Ltd., Larsen & Toubro Ltd.
(L&T), Mahindra & Mahindra Ltd. (M&M), Maruti Suzuki India Ltd., NTPC Ltd., Oil and
Natural Gas Corporation Ltd. (ONGC), Ranbaxy Laboratories Ltd., Reliance
Communications Ltd.(RCOM), Reliance Industries Ltd.(RIL), Reliance Infrastructure Ltd,
Satyam Computer Services Ltd., State Bank of India (SBI), Sterlite Industries (India) Ltd.,
14
Tata Consultancy Services Ltd.(TCS), Tata Motors Ltd., Tata Power Company Ltd., Tata
Steel Ltd., Wipro Ltd, which was categorized into 4 classification namely, first quarter,
second quarter, third quarter and fourth/final quarter. During the study period the 30
companies made 273 announcements namely, financial related announcements
numbering 119, dividend related 35, bonus and rights issue 5, merger and acquisition
18, allotment of shares 33 and press/media release 63. The announcement dates were
collected from the official websites of respective companies. To examine the effect
of corporate announcement on share price behaviour, a daily closing stock price were
collected from the official website of Bombay Stock Exchange (www.bseindia.com)
and the daily stock returns were calculated.
The main study to test the corporate announcement and return is done through
event studies. The methodology used to test the impact of corporate announcement
on share price returns with event studies was developed by Fama et al. During the
announcement period the relationship of these announcements on share price
movements have been identified with before and after the event days with
Cumulative Average Abnormal Returns (CAAR). The event date considered is the
period from 10 days before and after the corporate announcement.
The objective of the study is to identify the individual investors‟ investment
behavioural pattern to corporate announcements. The survey was focused on the
individual investors‟ point of view about the attitude of individual investors‟, were
selected and interviewed during April 2008 to March 2009. The investors were asked
to identify the important corporate announcements and according to their preference
six corporate announcement have been chosen namely financial results, dividend,
bonus and rights issue, merger and acquisition, allotment of shares and press/media
release according to their priority.
The awareness level is not directly determined through a unique response, but
it has been ascertained through various factors, which are having direct and
inceptional effect over awareness level of investors. The awareness level possesses
multifarious dimensions, inceptional point of investment, starting to invest in shares,
frequency of trade, best investment strategy considered most important at the time of
15
investment, fundamental and technical analysis for investment decision etc. For this
purpose, 438 investors have been selected as explained in the selection of sampling
from 4 major districts of Tamil Nadu. Data related to evaluate the impact of
corporate announcements on individual investor‟s behavioural pattern have been
collected. They were subject to statistical analysis, such as, percentage analysis,
multifarious techniques and correlation analysis. Interpretations have been made and
finally suggestions have been made to improve the investor‟s investment decision.
1.13. SAMPLE SELECTION
1.13.1. Data Sources
The primary data were collected through interview schedule and focused with
discussion. The interview schedule was prepared through the wide review of
literature and keeping in view the objectives of the study. Pre-testing was on a
sample of 42 investors in Chennai (24) and Coimbatore (18) districts and after pre-
testing the schedule was redrafted and used for data collection. The corporate
announcement dates used in this study were extracted from a database composed of
the historical records of corporate announcement in Bombay Stock Exchange (BSE)
website. The period of the study was 1st April 2008 to 31
st March 2009, and the
companies selected were all companies quoted on the Bombay Stock Exchange
Sensitive Index. The number of announcements collected was 273, and those
announcements that were related to investment alone were selected to construct the
sample. Apart from this, the purpose of the study is to identify the impact of
corporate announcements on reactions of security prices. In order to achieve the
objective the daily closing prices of 30 companies were obtained from the online
database of BSE (www.bseindia.com) and used.
1.13.2. Sample Design
The study is related to corporate announcements and share price behaviour.
The investors having awareness about stock market and corporate announcements
have been selected from 4 leading major districts in Tamil Nadu, namely Chennai,
Coimbatore, Madurai and Trichy. The procedures of selection of 438 sample
investors in 4 districts have been given below:-
16
Table – 1.1 Selection of Investors in 4 districts
Districts Tested Investors Selected Investors
Chennai 186 149
Coimbatore 167 123
Trichy 142 92
Madurai 91 74
Total 586 438
1.13.3. Selection of Investors
The main criterion for selection of investors was that the investors should be
well informed about stock market and they must know the significance of corporate
announcement on share price behaviour. To evaluate in this aspect the researcher
have prepared special questionnaire to identify and measure well-informed investors.
The researcher was able to meet 248 investors in Chennai district followed by 223 in
Comibatore, 123 in Madurai and 187 in Trichy. Out of them in Chennai district 186
investors, 167 in Coimbatore, 91 in Madurai and 142 in Trichy were willing to test.
Out of them 149 investors in Chennai district, 123 in Coimbatore district, 74 in
Madurai district and 92 in Trichy district have fulfilled the criterion for selection of
sample investors. These investors were selected from the list of investors kept in
Depository Participants (DPs) offices in 4 major selected districts in Tamil Nadu.
The district-wise depository participant‟s selection of investors is given below:
Table - 1.2 Names of the Depository Participants in Chennai District
S.No Name of the Depository
Participants
Available
Investors
Tested
Investors
Selected
Investors
1 Emkey share & Stock Brokers (P) ltd. 21 15 11
2 Arkay Stocks ltd. 18 13 9
3 Vartex Securities ltd. 21 16 14
4 Karvy stock Broking ltd. 23 14 10
5 Angel Broking ltd. 19 15 13
6 Motilal Oswal Securities ltd. 14 10 8
7 Religare Securities ltd. 15 12 10
8 Geojit Financial Services ltd. 19 15 13
9 Way 2 Wealth Securities ltd. 15 12 9
10 Edelweiss Securities ltd. 17 13 8
11 Kotak Securities ltd. 24 18 15
12 ifci Financial Services ltd. 23 19 16
13 Integrated Securities ltd. 19 14 13
Total 248 186 149
17
Table - 1.3 Names of the Depository Participants in Coimbatore District
S.No Name of the Depository
Participants
Available
Investors
Tested
Investors
Selected
Investors
1 Annamalai Capital Services ltd. 21 17 9
2 Enam Securities ltd. 19 12 8
3 Kotak Securities ltd. 15 9 6
4 Geojit Financial Services ltd. 23 18 13
5 Share Khan ltd. 16 13 11
6 Muthoot Secutires ltd. 23 19 13
7 Skyes & Ray Equities ltd. 18 12 9
8 Reliance Securities ltd. 19 15 12
9 Coimbatore Capital ltd. 20 14 11
10 Way 2 Wealth Securities ltd. 25 17 14
11 Fortune Stock Broking ltd. 24 21 17
Total 223 167 123
Table - 1.4 Names of the Depository Participants in Madurai District
S.No Name of the Depository
Participants
Available
Investors
Tested
Investors
Selected
Investors
1 Fairwealth Securities ltd. 10 8 7
2 Aditya Birla Securities ltd. 9 6 5
3 Indiabulls Stocks lts 7 4 3
4 Karvy Stock Broking ltd. 11 10 9
5 Emkey Secruties ltd. 8 5 4
6 Reliance Money ltd. 7 6 5
7 Kotak Securities ltd. 9 6 4
8 Geojit Financial Services ltd. 6 3 2
9 Way 2 Wealth Securities ltd. 8 5 3
10 Edelweiss Securities ltd. 7 6 5
11 Stock Holding Corporation ltd. 9 7 6
12 HDFC Securities ltd 8 6 5
13 Angel Broking ltd 11 9 8
14 HSBC InvestDirect 7 6 5
15 Religare Securities ltd. 6 4 3
Total 123 91 74
18
Table - 1.5 Names of the Depository Participants in Trichy District
S.No Name of the Depository
Participants
Available
Investors
Tested
Investors
Selected
Investors
1 Karvy Stock Broking ltd. 15 12 9
2 Kotak Securities ltd. 19 17 13
3 Geojit Financial Services ltd. 24 21 15
4 Share Khan ltd. 18 10 6
5 HSBC Securites Ltd. 21 19 8
6 Integrated Securities ltd. 11 7 5
7 Reliance Securities ltd. 22 13 9
8 India Infoline ltd. 20 16 11
9 Way 2 Wealth Securities ltd. 22 15 9
10 Coimbatore Capital Ltd 15 12 7
Total 187 142 92
1.14. PILOT STUDY
A pilot study was conducted among a group of 42 members which constituted
10 percent of the total sample. Based on the results of the study and personal
observations, the significance of corporate announcement on share price movement
has been identified. Apart from this, the researcher could concentrate the investment
behavioural pattern of individual investors on the basis of nature of corporate
announcement. The investors should take appropriate investment decision and they
have to reduce the loss. Due to this, the researcher widened the scope of the study by
correlating the corporate announcement and individual investor‟s investment pattern.
The statements included in the interview schedule were subjected to the test of
reliability using cron-bach‟s alpha criterion. Value obtained is 0.7897 which shows
that the instrument is highly reliable. Accordingly, the schedule has been restructured
and finalized to conduct the survey.
1.15. TOOLS USED FOR THE ANALYSIS OF DATA
Data presentation is done using extensive tables and charts.
1.15.1. Daily Returns - The daily returns were calculated for individual securities.
19
1.15.2. Expected Returns - The expected returns were calculated for individual
securities.
1.15.3. Abnormal Returns - The abnormal returns were calculated for individual
securities over the designated period.
1.15.4. Cumulative Abnormal Returns (CAR) - The Abnormal Returns were the
total of returns from individual securities over the designated period.
1.15.5. Average Abnormal Returns (AAR) - The Average Abnormal Returns were
calculated by total of abnormal returns from individual corporate announcements
dividing the number of individual corporate announcements.
1.15.6. Cumulative Average Abnormal Returns (CAAR) - The Average Abnormal
Returns were total of returns from individual corporate announcements.
1.15.7. t-test - t-test was used to analyse the significant relationship between
corporate announcements and share price behaviour.
1.15.8. Correlations - The correlation technique was applied to explore the relationship
of corporate announcement and individual investors‟ investment behavior.
1.16. LIMITATIONS OF THE STUDY
1. The study covered only 30 companies, which were taken for calculating
Sensitivity Index of Bombay Stock Exchange. Other listed companies
were not taken for the study.
2. The study concentrates only on the corporate announcement of 30 listed
companies and not considers other information available in the market
during the study period.
3. In addition, the study focused only on the behavioural investment pattern
of individual investors in Tamil Nadu.
1.17. THESIS OUTLINE
The FIRST chapter introduces the research problem in general and focuses on
the actual problem of the research in the study area. The methodology is mentioned
in brief and it also mentions the corporate announcement with share price reaction
20
and individual investor‟s investment behavioural pattern in four major districts of
Tamil Nadu and also explains the methodology of the research, the nature of the
samples and the methods used to select the sample and the formulas used to collect
and interpret the samples.
The SECOND chapter deals with the literature related to the research problem.
The literature shows the evidence of the results which the researcher has found in the
study area, mainly focuses on the corporate announcement, share price reactions and
individual investor‟s investment behavioural pattern and the gaps in the earlier
research are mentioned in this chapter.
The THIRD chapter explains the significance of corporate announcement,
share price reactions, individual investor‟s investment behaviour and describes the
various types of corporate announcements.
The FOURTH chapter analyses the impact of corporate announcements on
reactions of security prices.
The FIFTH chapter evaluates the impact of corporate announcement on
individual investors‟ investment behavioural pattern.
The SIXTH chapter summarises the research findings and suggestions.
21
REFERENCES
1. Fama, E., (1970), “Efficient capital markets: A review of theory and empirical
work”, Journal of Finance, Vol. 25, pp. 383 – 417.
2. Beaver (1968), “The Information Content of Annual Earnings Announcements”,
Journal of Accounting Research, Vol.7, Pp. 67 – 92.
3. Foster T.W and Vickrey D (1978) “The Information Content of Stock Dividend
Announcements” Accounting Review, 53:2 (April) pp. 360-370.
4. Beaver, W., R. Clarke, and W. Wright, (1979), “The Association between
Unsystematic Security Percentage Change in Prices and the Magnitude of
Earnings Forecast Errors”, Journal of Accounting Research, Vol. 17, pp.
316–40.
5. Obaidullah. M, (1992), “How do Stock Prices React to Bonus Issues?,” Vikalpa,
pp 17-22.
6. Srinivasan.R (1997), “Security Prices Behavior Associated with Right-Issue
related Events” The ICFAI Journal of Applied Finance, Vol.3, No.3,
pp.71-81.
7. Jijo Lukose P. J. and Narayan Rao. S, (2002), “Does Bonus Issue Signal Superior
Profitability? A study of the BSE Listed Firms”. Downloaded from:
http://papers.ssrn.com/
8. Raja. M, Clement .J, Sudhakar and Selvam. M, (2009), “Testing the Semi-Strong
form Efficiency of Indian Stock Market with Respect to Information Content
of Stock Split Announcement – A study in IT Industry”, International Research
Journal of Finance and Economics, Issue 25, pp. 7 – 20.
9. Daniel, K., D. Hirshleifer, and A. Subrahmanyam, (1998), “Investor Psychology
and Security Market Under- and Overreactions,” Journal of Finance, Vol. 53,
pp. 1839-1885.
10. E.F. Fama, L. Fisher, M.Jensen, and R. Roll, (1969), “The Adjustment of Stock
Prices to New Information”, International Economic Review, Vol.10,
pp.1 – 21.
11. Brown, Stephen J., and Jerold B. Warner, (1980), “Measuring Security Price
Performance”, Journal of Financial Economics, Vol. 8, pp. 205-258.
top related