Evidence on Changes in Stock Prices and Liquidity Around Rights Issue Announcement: Industry Specific Analysis

International Journal of Business Insights and Transformation Volume 5 Issue 2 (April 2012-September 12)

31 Pages Posted: 4 Mar 2015

See all articles by Madhuri Malhotra

Madhuri Malhotra

Loyola Institute of Business Administration

M. Thenmozhi

Indian Institute of Technology Madras

G. ArunKumar

Indian Institute of Technology (IIT), Madras

Date Written: September 1, 2012

Abstract

This study examines the effect of rights issue announcement on firms’ abnormal returns with respect to Indian firms in chemical, textile, IT and finance sectors respectively. Event study methodology has been used for the purpose of studying the rights issue announcement reaction. Liquidity changes around the rights issue announcement have been captured using the trading volume, raw trading volume and liquidity ratios. Rights issue announcement yields a positive return around the announcements date in the case of textile, IT and finance sectors, whereas, in the case of chemical sector, the rights issue announcement yields a negative reaction. The results of the study show that in the case of chemical and finance sectors, the stock market is semi strong form efficient as against textile and IT sectors. In the post announcement period, the announcement reaction is positive for textile and finance sectors and negative for chemical and IT sectors. The rights issue announcement reflects investor’s sentiments about the market as a whole. Liquidity has decreased across all sectors as the liquidity ratio which captured market depth is significantly negative for all sectors under study. The study supports signaling hypothesis and information content hypothesis, but rejects liquidity hypothesis.

Keywords: Event study, Rights Issue, Stock Return, Liquidity, Market Depth, Market Efficiency, Signaling hypothesis, Industry Effect.

JEL Classification: G14, G32

Suggested Citation

Malhotra, Madhuri Satsangi and Thenmozhi, M. and ArunKumar, G., Evidence on Changes in Stock Prices and Liquidity Around Rights Issue Announcement: Industry Specific Analysis (September 1, 2012). International Journal of Business Insights and Transformation Volume 5 Issue 2 (April 2012-September 12). Available at SSRN: https://ssrn.com/abstract=2398793

Madhuri Satsangi Malhotra (Contact Author)

Loyola Institute of Business Administration ( email )

Loyola College
Chennai
Tamil Nadu
India
+91 044 28177191 (Phone)

HOME PAGE: http://www.liba.edu

M. Thenmozhi

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

G. ArunKumar

Indian Institute of Technology (IIT), Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu 600036
India

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