The project is done to find out the impact of stock split on the stock market. In our project, we have made use of event study methodology to assess the accuracy of stock price reaction of 39 public listed Indian companies in National Stock Exchange (BSE) in the year 2006 and onwards. The abnormal returns (actual returns-returns from regression line) results were taken for 20 days before and after the announcement date to test whether the result is significant or not (Level of significance=5%). The project shows that there is no significance difference in the price level before the announcement date while after the announcement date, there was a significant difference in the price level for few days(level of significance being 5%) The project supports the hypothesis that Indian stock market is semi strong efficient.
Efficiency of stock market:
Market efficiency signifies how “quickly and accurately” does relevant information have its effect on the asset prices. Depending upon the degree of efficiency of a market or a sector thereof, the return earned by an investor will vary from the normal return. The efficient market hypothesis states that it is not possible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.
An Event study uses transactions data from financial markets to predict the financial gains and losses associated with newly disseminated information. For example, the announcement of a merger between two firms can be analyzed to make predictions about the potential merger-related changes to the supply and the price of the product(s) subject to the merger Event studies seek to analyse the impact of a specified class of events on the prices of securities. The most widespread use of the event study is in testing the Efficient Market Hypothesis (EMH). Efficiency is demonstrated by showing that the market response to an event takes place either before the event or very shortly after the event - information is either anticipated or very quickly assimilated. The pioneering work on event study was done by Ball and Brown (1968) and Fama, Fisher, Jensen and Roll (1969) (henceforth referred to as FFJR). The methodologies used in these studies have become a standard technique for testingThe EMH. Over the last two decades a variety of events such as announcement of stock splits, announcement of earnings, mergers and takeovers have been studied by researchers for examining market efficiency. Though several modifications have been made to the original methodologies, their basic structure has remained unaltered.
Event studies of stock returns have been used extensively in the economics and finance Literature, often with insignificance of abnormal returns being found (the null accepted).The standard event study methodology for a stock return based model follows a two-step(Or three step in some cases) estimation procedure. First one regresses a time series of firm stock returns on market returns during a pre-event “estimation window” in order to establish a prediction equation for “normal” movements in the stock. This is performed for each firm which experiences an event. Then for each event, one finds the “abnormal return” over an “event window” by taking the difference between actual firm returns and the estimated firm returns for this time period as predicted by the first stage regression. Once this has been done, one can evaluate the hypothesis that abnormal returns from the events analyzed are, for example, positive. This is done by treating the abnormal returns as a random variable and testing significance given a null hypothesis of zero abnormal returns.
Objectives of the Study
The objectives of the study are as follows:
1. To test the stock market reaction to...