Share price reaction to the rights issue announcements at Colombo stock exchange- Sri Lanka (CSE)

Abstract

The study investigates the reaction of the share prices due to the Rights Issue announcement on the Colombo Stock Exchange (CSE) from 2012 to 2021 and tests its semi-strong form efficiency. Event Study Methodology combined with a basic t-testing model and Crude Dependence Adjustment Method (CDAM) to capture the event clustering effects have been used in the analysis. Private capital asset evaluation through CAPM generates abnormal return computations. The researcher analyzed 63 valid Rights Issue announcements, separating them into trading volume, issue size, and industry classification. A 50-day estimation period is considered with a 36-day testing phase which includes a 10-day pre-event window, the event day, and a 25-day post- event window. The study's findings denote a negative trend in share prices for most sub- sample data with an Average Abnormal Return (AAR) and Cumulative Abnormal Return (CAAR) on announcement day dipping towards negatives. The share price does not show a negative significant reaction in relation to two sub-samples [instead it shows a positive movement], which contained companies with low trading days and medium trading days, as both these subgroups contained little data. The results of CDAM tests further reject the null hypothesis, which shows that Rights Issue announcements significantly affect stock prices. Overall results show that CSE displays the traces of semi-strong efficiency, indicating that new information quickly affects share prices. In such a scenario, it is hard to earn profits if someone has insider information. Increasing in market efficiency can be achieved through technological improvements, better access to information, and market maturity.