Abstract:
This study examines the rights issues announcement and thereby provides a test of the
semi-strong form of market efficiency on Colombo Stock Market in Sri Lanka using the
event study methodology with Mean Adjusted Abnormal Return Model (MAARM).
A number of empirical studies show contradictory results. This study addresses two
major empirical questions: (a) How does the Sri Lankan share market respond to rights
issues announcement in terms of the number of trading days, liquidity of stocks, the size
of the rights issues, the sectors, and the year? (b) What form of market efficiency is
there in Sri Lankan share market?
These issues are investigated through an overall sample of 50 rights issue
announcements relating to 44 companies in 14 sectors for the period from January 1994
to December 2003. For the analysis the researcher considered an estimation period of
75 days and test period of 51 days.
The study concludes that, first, overall sample at portfolio level reveals that rights issues
have statistically positive reaction on share price around the days very close to the
announcement day. And thereafter, results show mixed of positive and negative
reactions. However, the evidence of this study is not consistent with the semi-strong
form of market efficiency. Second, market reacts dramatically to announcements of
rights issues for illiquid stocks and that exhibit significant positive reaction compared to
the liquid and moderate level liquid stocks. And all three samples results do not confirm
the semi-strong form of market efficiency. Third, share price reactions vary according to
the size of the rights issue. The market reacts positively to the announcement of rights
issue when the larger the size of rights issues. And it is inconsistence with the
proposition that larger the size of rights issues has larger the significant positive reaction.
Fourth, the share price reactions vary according to the sector. Bank, finance and
insurance sector results confirm the semi-strong form of efficiency while other sectors do
not confirm it. .Finally, the results of the share price reactions vary according to the year.
Generally, the result of all the years confirms the result of the overall sample relating to
semi-strong form of efficiency. But years 1998 and 2003 only confirms the nature and
significance of the share price reaction.
