Stock Price Reaction to Rights Issue Announcement: Evidence from the Indian Stock Market
Posted: 14 Aug 2012
Date Written: July 9, 2012
Abstract
The main aim of this paper is to study the stock price reaction to rights issue announcement in the Indian stock market. It also tests three hypotheses: Overvaluation Hypothesis, Market Condition Hypothesis, and the Hypothesis related to stock return variance. The sample for the study consists of 40 rights issues announced during 2008-2010. The study employs the event study methodology using daily stock returns. The event window is taken as day -10 to day +10 from the announcement day. For testing the hypotheses, multivariate regression analysis is done, taking the Cumulative Abnormal Returns (CAR) (-1, +1) as the dependent variable and the issue size, market cumulative return and daily stock return variance as the independent variables. The results of the study show that there is a positive reaction to the announcement. However, the returns are not statistically significant in any of the days in the event window period. The study does not find support for any of the three hypotheses. The positive reaction implies that the market interprets the equity issue announcement as favourable information about the issuing firm and such announcements can be used to signal the firm’s growth opportunities. The limitation of the study is that it covers a period of only three years. A major contribution of the paper is that by examining the market reaction to the rights issue announcement the study throws light on the implications of such announcements on the market value of the firm.
Keywords: Rights issue, Event study, Abnormal returns, Stock return variance
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