The Tale of One Market Inefficiency: Abnormal Returns Around GDR Issues by Indian Firms

Abstract:     
This article relates the experience of abnormal returns on the Bombay Stock Exchange surrounding the pricing date of GDR issues by Indian firms.On 15 May 1994, empirical evidence suggesting that such abnormal returns do exist was released into the information set of agents in the financial industry. Today, as many GDR issues have taken place after 15 May 1994 as had taken place before, and we can measure how this mispricing has changed. We find that the extent of mispricing has dropped sharply: the highest point in the average cumulative returns in excess of the market index over the weeks preceding the pricing date have dropped from 18.9% for the 20 GDR issues before 15 May 1994 to 6.9% for the 26 GDR issues after this date. This reduction in the extent of mispricing is consistent with our understanding of arbitrage by rational agents in financial markets.

JEL Classification: G14, G15, O16

working papers series