CHAPTER I INTRODUCTION AND DESIGN OF THE...

CHAPTER – I

INTRODUCTION AND DESIGN OF THE STUDY

1.1. INTRODUCTION

The financial sector in India has undergone many reforms, particularly in the

capital market segment, since 1990s. A functioning stock market is an essential

component in a competitive economy, as it provides a mechanism for allocating the

economy capital stock. In an ideal situation, the stock market will maximize the total

utility of the economy. The share price fluctuations in the market can affect the

economy of the nation. A fluctuation occurs in the price level of stock because of

changes in several factors, like economical, social and political. Apart from these

factors information released by the corporate bodies causes volatile nature in share

prices. However, the corporate announcement has considerable impact on the share

price movements. Moreover, the individual investors change their investment pattern

depending upon the release of information by the corporate bodies. In other words,

the corporate announcements reflect wide variations in the share prices and investors‟

behavioural pattern. This fact is brought into the companies regularly making

significant announcement with positive and negative information which will reflect

in their share prices. When corporate announcements contain good news, the stock

prices go up, whereas announcements containing bad news push the stock price

down. Given this reality, the investor can react positively or negatively depending

upon whether it is positive or negative information. Hence the market reactions

indicate that the known information is immediately discussed by all investors and it

reflects in share prices in the stock market. The information that affects the prices of

securities are, strikes, lockouts, joint venture agreements, launching of new products,

financial reports include annual and quarterly releases, press releases, declaration

of dividend including interim dividend, outcome of board of directors meeting,

outcome of annual general meeting, rights issue, bonus issue, allotment of equity

shares including allotment of shares under employee stock option scheme,

amalgamation, acquisition, buy-back offer and sale of shares etc. Among these

various corporate announcements giving information, some are likely to be having

most significant impact on the share price fluctuation. It is obvious that prices play a

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key role in a stock market, as investors‟ allocation decision will depend on the prices

of the traded stocks. Fama1 articulates the ideal of a well functioning stock market as

follows:

“In general terms, the perfect is a market in which prices provide precise

signals for resource allocation: that is, a market in which firms can make production-

investment decisions, and investors can choose among the securities that represent

ownership of firms‟ activities under the assumption that security prices at any time

„fully reflect‟ all available information”.

The statement that, “assumption that security prices at any time „fully reflect‟

all available information” refers to the investors who are concerned with the question

of whether prices are reasonable or not. The only way for investors to determine the

fairness of prices is to utilize available information in order to try to establish the

intrinsic value of the traded stocks. The point that Fama emphasizes, however, is that

the potential investors do not need to be afraid about whether prices are fair or not if

they can assume that prices already “fully reflect” all available information.

Therefore, if informed traders are likely to trade on valuable private

information in the period leading up to dividend announcements, the study expects

market liquidity to be low preceding the event. However, low liquidity might only

occur when the timing of the dividend announcement is known in advance (i.e.,

anticipated). When the timing of the dividend announcement is unknown (i.e.,

unanticipated), uninformed investors will, by definition, trade normally before the

event. In contrast, informed investors might exploit their superior information before

the event, unless they are barred from doing so for legal reasons. If the informed do

not trade before unanticipated announcements, or if they mask their trades

sufficiently that the market maker does not detect their trades, market liquidity will

appear normal although volume might be higher. In contrast, if the informed trade on

their valuable information and the market maker is aware of and reacts to this trading

activity, market liquidity will deteriorate before unanticipated events. The traditional

models assume that the announcement reduces informational asymmetry between the

informed and uninformed. Thus, spreads should return to normal soon after the new

information is processed by the market. In standard asymmetric information models,

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at the time of the event, price volatility increases with the amount of new information

impounded into market prices, representing the revision in investors‟ beliefs.

However, as soon as the new information is impounded, volatility should decline

because informational asymmetry has declined.

The impact of security prices to the release of different information: Beaver

(1968)2, Foster (1981)

3, Beaver, Clarke and Wright (1979)

4 made some of the studies

which find significant reaction in the security prices to the release of corporate events

and announcement of information. Another finding of these studies is that during the

announcement period, there are abnormal returns. On the Indian stock market, M.

Obaidullah (1992)5, R.Srinivasan, (1997)

6, Jijo Lukose and Narayan Rao (2002)

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made some of the studies which have tested the efficiency of the Indian stock market

with respect to corporate events and dividend announcement, bonus announcement,

rights issue, merger and acquisition, stock splits etc. A few Indian studies have tested

the efficiency of the Indian stock market with respect to information content of stock

split announcement. Further, these studies could not find out the exact period during

which the market reacts to a information of price changes (Raja.M, Clement.J

Sudhakar and Selvam.M, 2009)8. With this in mind, the objective of this study is to

explore the impact of corporate announcements on security price reactions.

Furthermore, the study also examines the individual investor‟s behaviour in terms of

corporate announcement surprises which may be caused by information releases.

1.2. CORPORATE ANNOUNCEMENT

It is a significant piece of news given to the public by corporate bodies. For

example, if a company declares dividend, the announcement occurs when the day the

news is given to the media to report to the public. As the announcement may affect

the companies‟ stock price, many analysts observe stock performance on the

announcement date and consider it is a gauge of how the market will treat the news.

This undeniable reality is brought out from every day the financial markets react to

announcements not only from individual firms but also from the market events.

When corporate bodies report good news, stock prices go up, whereas

announcements that contain bad news push the stock price down. Given this veracity,

the investor who is able to gain access to information prior to it reaching the market

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can buy or sell ahead of the information. In particular, the corporate announcements

contain new information about the current and future expected profitability and

growth prospects of the firm.

The corporate entities express their operating and financial performance,

growth and prospects activities by way of several information like, financial results

including First Quarter (Q1), Second Quarter (Q2), Third Quarter (Q3), and Fourth

Quarter (Q4) or final, dividend including interim dividend, Allotment of equity shares

including Employee Stock Option Scheme/Plan (ESOS), Merger and Acquisition,

Bonus and Rights issue, and press/media releases. The content of announcements

may differ from one corporate entity to another depending on the sectors. This would

lead to know about the firm by the investors and it has more advantage to the

investors, who can execute their investment decisions based on the importance of

announcements. Thus, the corporate announcements play a vital role in the

investment behavioural pattern of the individual investors. The changes in investors‟

investment behavioural pattern on the basis of corporate announcement followed by

the share market have a significant role in the share price reactions.

1.3. SHARE PRICE MOVEMENTS

A share price is the price of a single share of a company's stock. Once the

stock is purchased, the owner becomes a shareholder of the company which issued

the share. Stock price movement, by definition, is driven by revisions of expected

future cash flows and or of expected discount rates. Stock price changes every day as

a result of market forces. Do waves of market-wide optimism or pessimism, or

investor sentiment, influence the stock market response to firm specific news? The

vast number of event studies published over the past decades in the areas of finance,

accounting, law and economics have largely ignored this question.

An event study typically pools together events that occur during boom times

with events that occur during bear periods. Tests are then conducted, for instance, to

quantify the impact of various corporate events on the fundamental value of the firm.

The implicit assumption therein is that the stock price reaction to corporate

announcement is independent of the current optimistic or pessimistic state of the

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market. If more people want to buy a stock (demand) than to sell it (supply), then the

price level goes up. Conversely, if more people want to sell a stock than to buy it,

there would be greater supply than demand, and the price would fall; what‟s difficult

to comprehend is what makes people like a particular stock and dislike another stock.

This comes down to figuring out what news is positive for a company and what news

is negative. Thus, the volatility of share prices around several corporate

announcement dates provides an indication of the changes in share prices before and

after the corporate announcements. Whenever the information is released to the

public, it signals to the market that their share price may react or may not react in the

securities. The investors respond differently to several types of announcements by

the corporate entities. The investor may react positively or negatively to corporate

announcements as it is revealed in the share prices. The positive reaction from the

investors implies uptrend in the market and negative from the investors implies

downtrend in the market. However, it would reflect the changes in the security

prices.

In an efficient market, prices respond instantaneously to new and material

information and fully reflect the information. Delayed responses (under-reaction) and

overreaction to new information would suggest that markets are inefficient. A price

of securities in the capital market moves whenever there is trading among investors.

In general, trading volumes will be affected by the flow of information to the capital

market. Whenever there is new information, market participants will react swiftly to

the latest available information. There are three major reactions in efficient and

inefficient market as stated below:

1.3.1. Immediate price adjustment - When there is new information in an efficient

market, security prices will respond immediately/adjust/reflect rapidly. There is no

tendency for subsequent increase and decrease.

1.3.2. Reaction delayed - A new piece of information will make security prices to

adjust gradually. For example, when there is new information, a security need

twenty one days period of lapse period before the price fully reflects the new

information.

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1.3.3. - Reaction overreacted: The new available information causes the price of the

security to be over adjusted. Normally, this reaction is characterized by a bubble.

Due to their nature, corporate actions are likely to have the most significant impact

on share prices and the trading activity of firms‟ securities on the announcement day.

For example, corporate announcements often alter firms‟ future cash flows, and

provide new signals about their profitability and changes in financing structure.

Furthermore, some corporate announcement types can affect the value of firms

indirectly for example, by altering trading costs in the secondary markets. The results

documented in this report confirm that corporate announcement often have

significant implications for share prices and trading activity, and provide evidence on

the diversity of these implications, depending on the corporate announcement type.

The overall objective of this research project is to examine the ways in which

accurate and timely corporate announcement information could benefit financial

organizations and their customers by improving the effectiveness of their trading

strategy and quality of advice offered to their clients. For example, investors might

use corporate announcement to develop strategies that make use of predictable

movements in share prices, or take advantage of the ability to predict changes in

share price volatility. At the same time, predictable movements in trading activity are

likely to provide greater understanding of the trading liquidity that investors can

expect to observe on a given day.

1.4. INVESTOR’S BEHAVIOUR

An individual investor who makes investments in his own name and can act

on behalf of others, for example, stock brokers or mutual fund managers make

investments for others or else an investor can make investments for ones own

personal account. An individual investor is a person who manages his/her own

money in order to achieve personal financial goals. Individual investor who consider

investing in individual stock have a lot of information to process; they are bombarded

with a flood of information, some of which might be relevant for their decisions,

some of which might be not perhaps instead of trying to obtain that information,

people simply follow their gut-feelings or a fad and are thus “behavioural” trader.

Theoretical research as well as empirical evidence offer mixed results regarding

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individual investor trading strategies and motives behind them. Empirical

investigations into individual investor behaviour have thus focused on analyses of

data.

This study is able to gather detailed data on individual investors‟ investment

behavioural pattern. This is the main motivation behind the study. The other driving

force behind the study was the need to advance the motives for trading by

individuals, particularly concerning the utilisation and responsiveness to information.

This study was conducted on experimental basis necessary to directly examine the

relationship between individual investors‟ investment behavioural pattern and

corporate announcement. As these issues are of particular importance in financial

markets – this study is to investigate directly the relevant decision processes.

1.5. CORPORATE ANNOUNCEMENTS, SHARE PRICES AND

INVESTORS’ BEHAVIOUR

The initiation of corporate announcement may have significant implications

on the financial risks of market participants. These effects can be explained by the

„economic nature‟ of corporate announcement. In particular, corporate announcement

often contains new information about the current and expected profitability and

growth prospects of firms, or they can result in changes in firms‟ operations and

financial structure. At the same time, corporate announcement can constitute a

transfer of wealth between shareholders and bondholders, alter trading costs in

secondary markets, and have other direct and indirect effects on a firm‟s value. In

this study, the effects of corporate announcements associated with announcement

dates are analysed using three measures.

1.5.1 Share price returns – Share price returns around on announcement dates

provide evidence on the extent to which the particular corporate announcement type

is associated with a positive or negative share price effect on the specific dates in the

corporate announcement.

1.5.2. Share price return volatility – Estimation of return volatility on

announcement dates provides an indication of the changes in return characteristics

and potential risks around specific dates in the media release information.

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1.5.3. Trading velocity – estimation of trading velocity (trading activity or trading

volume) on announcement dates provides an indication of the extent to which

corporate announcement alter investor behaviour and thereby, among other effects,

changing the level of liquidity that investors may experience in the secondary market.

These three facets of „market conditions‟ during the corporate announcement

may have significant implications for the profitability of certain trading strategies,

and the intermediaries‟ supply of trading services to their clients. Therefore, accurate

and timely corporate information that is available in a user-friendly format might

give financial intermediaries and investors an informational advantage that would

improve their trading strategies and reduce risks associated with corporate

announcements. The investigation of the precise mechanics of how this information

could be used by the intermediaries, however, is beyond the scope of this study.

In an efficient market, security prices at any given time fully reflect all

available information. A prior, there is good reason to believe that stock markets are

efficient because such markets are exemplary examples of competition. Nevertheless,

rather than adjusting immediately to new surprises, stock prices tend to drift over

time in the same direction as the initial surprises. This phenomenon is labeled as

earnings-momentum or Post-Earnings Announcement Drift (PEAD) and researchers

have provided three explanations for its existence and persistence. First, that

announcements with unexpectedly high (low) earnings make investing in these firms

more (less) risky, so the drift can be explained as a risk premium. Second, the

persistence of this anomaly can be due to high transaction costs (limits of arbitrage).

Third, the drift is a function of the type of information that the agents receive. The

behavioural theory posed by Daniel et al. (1998)9 emphasizes the distinction between

public and private information. In particular, the authors predict that investors will

under-react to public information and overreact to private information. The rational

structural uncertainty theories, on the other hand, argue that the distribution of

information in the economy is what matters. These theories predict that a high (low)

arrival rate of informed traders is associated with low (high) structural uncertainty

and hence low (high) drift.

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1.6. STATEMENT OF THE PROBLEM

The small and medium investors are motivated when their savings and

investments in the market are anticipated and appropriately valued. The corporate

announcements and their disseminations determined the efficiency of the stock

market. Hence, in this concern how quickly and correctly security prices react to this

corporate announcement show the efficiency of the stock market. In India very few

studies have been conducted to test the efficiency of stock market with respect to

corporate announcements. This situation raises the following questions:

1. What is the role of corporate announcements on individual investors‟

investment behavioural pattern?

2. Whether the individual investors do actually take into account

contemporaneous information when making their trading decisions?

3. What type of corporate announcement has more influence on the

investor‟s investment behavioural pattern?

In order to answer these questions, the study aimed to analyse the share price

reactions and individual investor‟s investment behaviourual pattern on the corporate

announcement of 30 listed companies of Bombay Stock Exchange.

1.7. OBJECTIVES OF THE STUDY

The information made by the corporate bodies might have significant impact

on the security prices and the investors‟ behavioural pattern. However, the

information received by the investors‟ under-react or over-react depends on the

corporate announcement type, this would imply that the stock market as a whole will

also under-react or over-react to corporate information. This logically follows

because only stocks with considerable uncertainty or slow information diffusion may

exhibit the under – and or overreaction patterns predicted by the behavioural

models. Motivated by this observation, the objectives of the study inter-alia are;

1. To study the various important corporate announcements of Bombay

Stock Exchange listed companies.

2. To identify the impact of corporate announcements on security prices and

3. To evaluate the impact of corporate announcements on individual

investors‟ investment behavioural pattern.

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1.8. HYPOTHESIS OF THE STUDY

The empirical evidence on security price reactions and individual investor‟s

investment behavioural pattern to corporate announcements has inspired researchers

to develop theories to explain seemingly abnormal results, thus contributing to a

better understanding of the phenomenon of capital markets. The study has proposed

hypothesis to explain security price reactions and individual investor‟s investment

behavioural pattern. These may fall into two categories:

H1: Corporate announcement has no significant impact on security price

reaction.

H2: Corporate announcements have no significant impact on the

individual investor‟s investment behavioural pattern.

To test the hypothesis, the event window is used before and after the

announcements by corporate entities, in order to carry out an analytical study to

determine the relationship between share price reactions and announcements made by

the corporate entities. Moreover, the study used the opinion survey through survey

method to find out the association between individual investor‟s investment

behaviour and corporate announcements.

1.9. SIGNIFICANCE OF THE STUDY

The study empirically evaluates the informal efficiency of stock market with

regard to the corporate announcements of 30 listed companies (Bombay Stock

Exchange). The significance of the study is that the investors can make use of

valuation of securities for corporate event announcement information. Corporate

event announcement information and stock market informal efficiency are of greater

interest to the investors, fund managers, policy makers, market regulators,

Government, researcher and the public. The present study is an attempt to test the

informal efficiency of stock market with respect to corporate announcement of

Bombay Stock Exchanges‟ listed companies.

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1.10. SCOPE OF THE STUDY

The notion that the corporate announcement might have strong implications

on share prices and investor behaviour is in general accepted by practitioners.

However, this belief is usually founded on observations related to the most visible

corporate announcement types. For example, significant share price volatility

following announcements of mergers or takeovers is well documented in both the

academic literature and popular press. The aim of this study is to consider the broader

range of corporate announcement types, and to seek evidence on whether the share

price and trading activity effects can be observed in this wider spectrum, and whether

these effects go beyond the announcement date. The study provides assessment of the

following corporate announcements namely, financial results including First Quarter

(Q1), Second Quarter (Q2), Third Quarter (Q3), and Fourth Quarter (Q4) or final,

dividend including interim dividend, Allotment of equity shares including Employee

Stock Option Scheme/Plan (ESOS), Merger and Acquisition, Bonus and Rights issue,

and Press/Media releases.

The present study tests the informal efficiency of stock market in the semi-

strong form of Efficient Market Hypothesis (EMH). For each corporate

announcement type, the analysis is based on corporate announcement events for one

year, from 1st April 2008 to 31

st March 2009. The study was restricted to corporate

announcement by the Bombay Stock Exchange listed companies during the period of

study. Further, the study did not cover the remaining information in the stock market.

It evaluates of the individual investors‟ investment behavioural pattern in Tamil

Nadu.

1.11. OPERATIONAL DEFINITIONS

1.11.1. Investment - Investment refers to the buying of a financial product or any

valued item with anticipation that positive returns will be received in the future.

1.11.2. Investor - A person who invests capital in order to gain financial returns.

1.11.3. Individual Investors - An individual who purchases small amounts of

securities for him/himself, as opposed to an institutional investors and also called as

retail investor or small investor.

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1.11.4. Well-informed investors - The investors who are rational are called well

informed investors. The investors, who have thorough understanding about the stock

market condition, make necessary analysis before going to invest in securities and

have understood the relationship between risk and returns and the significance of

corporate announcement are the well-informed investors.

1.11.5. Investor Behaviour - The decisions of investors by viewing information

structure and the characteristics of market and rationally or irrationally outcomes for

their self interest.

1.11.6. Corporate Announcements - An announcement made by the corporate

entities through a public statement containing information about an event that has

happened or is going to happen.

1.11.7. Security Price - A security price is the price of a single share of a company‟s

stock. Once the stock is purchased, the owner becomes a shareholder of the company

that issued the share.

1.11.8. Event Study - An event study is an empirical study of prices of an asset just

before and after some event, like an announcement, merger, or dividend.

1.11.9. Actual Return - Actual return is what investors actually receive from their

investments.

1.11.10. Expected Return - The expected return is the estimated return based on an

asset pricing model, using a long run historical average or multiple valuations.

1.11.11. Abnormal Return - Abnormal return mean the return to a portfolio in

excess of the return to a market portfolio.

1.11.12. Announcement Date - The announcement date is the first day the public

will receive the information regarding the events from the company.

I.11.13. Depository Participants - A Depository Participants (DPs) is described as

an agent of the depository. They are the intermediaries between the depository and

the investors. The relationship between the DPs and the depository is governed by an

agreement made between the two under the Depositories Act.

http://en.wikipedia.org/wiki/Agen

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1.12. METHODOLOGY

The study is both descriptive and analytical in nature. The study identifies the

impact of corporate announcement in share price reactions and individual investors‟

investment behavioural pattern. For this purpose, the standard methodology used to

evaluate the reaction of share prices to corporate announcement is an event study,

which was employed as early as Fama, Fisher, Jenshan and Roll. (1969)10

and Brown

and Warner (1985)11

. Event studies have been employed in much research and their

sophistication has been greatly improved. The events defined for this study were the

announcement of corporate bodies. The announcement date was considered as event

date. The study was using primary and secondary data. The instrument used to collect

primary data was questionnaire schedule and secondary data was collected from

various websites, journals, magazines, newspapers etc. The study follows personal

interview as the tool of survey using a questionnaire schedule.

In order to find out the main objective of the study, i.e., to examine the impact

of corporate announcement on reactions of security prices, the corporate

announcement dates were identified and used. The types of corporate announcements

are financial results including First Quarter (Q1), Second Quarter (Q2), Third Quarter

(Q3), and Fourth Quarter (Q4) or final, dividend including interim dividend, Bonus

and Rights issue, Merger and Acquisition, allotment of equity shares including

Employee Stock Option Scheme/Plan (ESOS), and Press/Media releases. The

population of the study is the corporate announcement of financial results, dividend,

bonus and rights issue, merger and acquisition, allotment of shares and press/media

release for 30 companies listed on the Bombay Stock Exchange during the year from

1st April 2008 to 31

st March 2009, namely, Associated Cement Company Ltd. (ACC),

Bharat Heavy Electronics Ltd. (BHEL), Bharti Airtel Ltd., DLF, Grasim Industries Ltd.,

Housing Development Finance Corporation Ltd. (HDFC), HDFC Bank Ltd., Hindalco

Industries Ltd., Hindustan Unilever Ltd. (HUL), ICICI Bank Ltd., Infosys Technologies Ltd.,

India Tobacco Company Ltd.(ITC), Jaiprakash Associates Ltd., Larsen & Toubro Ltd.

(L&T), Mahindra & Mahindra Ltd. (M&M), Maruti Suzuki India Ltd., NTPC Ltd., Oil and

Natural Gas Corporation Ltd. (ONGC), Ranbaxy Laboratories Ltd., Reliance

Communications Ltd.(RCOM), Reliance Industries Ltd.(RIL), Reliance Infrastructure Ltd,

Satyam Computer Services Ltd., State Bank of India (SBI), Sterlite Industries (India) Ltd.,

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Tata Consultancy Services Ltd.(TCS), Tata Motors Ltd., Tata Power Company Ltd., Tata

Steel Ltd., Wipro Ltd, which was categorized into 4 classification namely, first quarter,

second quarter, third quarter and fourth/final quarter. During the study period the 30

companies made 273 announcements namely, financial related announcements

numbering 119, dividend related 35, bonus and rights issue 5, merger and acquisition

18, allotment of shares 33 and press/media release 63. The announcement dates were

collected from the official websites of respective companies. To examine the effect

of corporate announcement on share price behaviour, a daily closing stock price were

collected from the official website of Bombay Stock Exchange (www.bseindia.com)

and the daily stock returns were calculated.

The main study to test the corporate announcement and return is done through

event studies. The methodology used to test the impact of corporate announcement

on share price returns with event studies was developed by Fama et al. During the

announcement period the relationship of these announcements on share price

movements have been identified with before and after the event days with

Cumulative Average Abnormal Returns (CAAR). The event date considered is the

period from 10 days before and after the corporate announcement.

The objective of the study is to identify the individual investors‟ investment

behavioural pattern to corporate announcements. The survey was focused on the

individual investors‟ point of view about the attitude of individual investors‟, were

selected and interviewed during April 2008 to March 2009. The investors were asked

to identify the important corporate announcements and according to their preference

six corporate announcement have been chosen namely financial results, dividend,

bonus and rights issue, merger and acquisition, allotment of shares and press/media

release according to their priority.

The awareness level is not directly determined through a unique response, but

it has been ascertained through various factors, which are having direct and

inceptional effect over awareness level of investors. The awareness level possesses

multifarious dimensions, inceptional point of investment, starting to invest in shares,

frequency of trade, best investment strategy considered most important at the time of

http://www.bseindia.com/

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investment, fundamental and technical analysis for investment decision etc. For this

purpose, 438 investors have been selected as explained in the selection of sampling

from 4 major districts of Tamil Nadu. Data related to evaluate the impact of

corporate announcements on individual investor‟s behavioural pattern have been

collected. They were subject to statistical analysis, such as, percentage analysis,

multifarious techniques and correlation analysis. Interpretations have been made and

finally suggestions have been made to improve the investor‟s investment decision.

1.13. SAMPLE SELECTION

1.13.1. Data Sources

The primary data were collected through interview schedule and focused with

discussion. The interview schedule was prepared through the wide review of

literature and keeping in view the objectives of the study. Pre-testing was on a

sample of 42 investors in Chennai (24) and Coimbatore (18) districts and after pre-

testing the schedule was redrafted and used for data collection. The corporate

announcement dates used in this study were extracted from a database composed of

the historical records of corporate announcement in Bombay Stock Exchange (BSE)

website. The period of the study was 1st April 2008 to 31

st March 2009, and the

companies selected were all companies quoted on the Bombay Stock Exchange

Sensitive Index. The number of announcements collected was 273, and those

announcements that were related to investment alone were selected to construct the

sample. Apart from this, the purpose of the study is to identify the impact of

corporate announcements on reactions of security prices. In order to achieve the

objective the daily closing prices of 30 companies were obtained from the online

database of BSE (www.bseindia.com) and used.

1.13.2. Sample Design

The study is related to corporate announcements and share price behaviour.

The investors having awareness about stock market and corporate announcements

have been selected from 4 leading major districts in Tamil Nadu, namely Chennai,

Coimbatore, Madurai and Trichy. The procedures of selection of 438 sample

investors in 4 districts have been given below:-

http://www.bseindia.com/

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Table – 1.1 Selection of Investors in 4 districts

Districts Tested Investors Selected Investors

Chennai 186 149

Coimbatore 167 123

Trichy 142 92

Madurai 91 74

Total 586 438

1.13.3. Selection of Investors

The main criterion for selection of investors was that the investors should be

well informed about stock market and they must know the significance of corporate

announcement on share price behaviour. To evaluate in this aspect the researcher

have prepared special questionnaire to identify and measure well-informed investors.

The researcher was able to meet 248 investors in Chennai district followed by 223 in

Comibatore, 123 in Madurai and 187 in Trichy. Out of them in Chennai district 186

investors, 167 in Coimbatore, 91 in Madurai and 142 in Trichy were willing to test.

Out of them 149 investors in Chennai district, 123 in Coimbatore district, 74 in

Madurai district and 92 in Trichy district have fulfilled the criterion for selection of

sample investors. These investors were selected from the list of investors kept in

Depository Participants (DPs) offices in 4 major selected districts in Tamil Nadu.

The district-wise depository participant‟s selection of investors is given below:

Table - 1.2 Names of the Depository Participants in Chennai District

S.No Name of the Depository

Participants

Available

Investors

Tested

Investors

Selected

Investors

1 Emkey share & Stock Brokers (P) ltd. 21 15 11

2 Arkay Stocks ltd. 18 13 9

3 Vartex Securities ltd. 21 16 14

4 Karvy stock Broking ltd. 23 14 10

5 Angel Broking ltd. 19 15 13

6 Motilal Oswal Securities ltd. 14 10 8

7 Religare Securities ltd. 15 12 10

8 Geojit Financial Services ltd. 19 15 13

9 Way 2 Wealth Securities ltd. 15 12 9

10 Edelweiss Securities ltd. 17 13 8

11 Kotak Securities ltd. 24 18 15

12 ifci Financial Services ltd. 23 19 16

13 Integrated Securities ltd. 19 14 13

Total 248 186 149

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Table - 1.3 Names of the Depository Participants in Coimbatore District


Participants

Available

Investors

Tested

Investors

Selected

Investors

1 Annamalai Capital Services ltd. 21 17 9

2 Enam Securities ltd. 19 12 8



5 Share Khan ltd. 16 13 11

6 Muthoot Secutires ltd. 23 19 13

7 Skyes & Ray Equities ltd. 18 12 9

8 Reliance Securities ltd. 19 15 12

9 Coimbatore Capital ltd. 20 14 11


11 Fortune Stock Broking ltd. 24 21 17

Total 223 167 123

Table - 1.4 Names of the Depository Participants in Madurai District


Participants

Available

Investors

Tested

Investors

Selected

Investors

1 Fairwealth Securities ltd. 10 8 7

2 Aditya Birla Securities ltd. 9 6 5

3 Indiabulls Stocks lts 7 4 3

4 Karvy Stock Broking ltd. 11 10 9

5 Emkey Secruties ltd. 8 5 4

6 Reliance Money ltd. 7 6 5




10 Edelweiss Securities ltd. 7 6 5

11 Stock Holding Corporation ltd. 9 7 6

12 HDFC Securities ltd 8 6 5

13 Angel Broking ltd 11 9 8

14 HSBC InvestDirect 7 6 5

15 Religare Securities ltd. 6 4 3

Total 123 91 74

18

Table - 1.5 Names of the Depository Participants in Trichy District


Participants

Available

Investors

Tested

Investors

Selected

Investors

1 Karvy Stock Broking ltd. 15 12 9



4 Share Khan ltd. 18 10 6

5 HSBC Securites Ltd. 21 19 8

6 Integrated Securities ltd. 11 7 5

7 Reliance Securities ltd. 22 13 9

8 India Infoline ltd. 20 16 11


10 Coimbatore Capital Ltd 15 12 7

Total 187 142 92

1.14. PILOT STUDY

A pilot study was conducted among a group of 42 members which constituted

10 percent of the total sample. Based on the results of the study and personal

observations, the significance of corporate announcement on share price movement

has been identified. Apart from this, the researcher could concentrate the investment

behavioural pattern of individual investors on the basis of nature of corporate

announcement. The investors should take appropriate investment decision and they

have to reduce the loss. Due to this, the researcher widened the scope of the study by

correlating the corporate announcement and individual investor‟s investment pattern.

The statements included in the interview schedule were subjected to the test of

reliability using cron-bach‟s alpha criterion. Value obtained is 0.7897 which shows

that the instrument is highly reliable. Accordingly, the schedule has been restructured

and finalized to conduct the survey.

1.15. TOOLS USED FOR THE ANALYSIS OF DATA

Data presentation is done using extensive tables and charts.

1.15.1. Daily Returns - The daily returns were calculated for individual securities.

19

1.15.2. Expected Returns - The expected returns were calculated for individual

securities.

1.15.3. Abnormal Returns - The abnormal returns were calculated for individual

securities over the designated period.

1.15.4. Cumulative Abnormal Returns (CAR) - The Abnormal Returns were the

total of returns from individual securities over the designated period.

1.15.5. Average Abnormal Returns (AAR) - The Average Abnormal Returns were

calculated by total of abnormal returns from individual corporate announcements

dividing the number of individual corporate announcements.

1.15.6. Cumulative Average Abnormal Returns (CAAR) - The Average Abnormal

Returns were total of returns from individual corporate announcements.

1.15.7. t-test - t-test was used to analyse the significant relationship between

corporate announcements and share price behaviour.

1.15.8. Correlations - The correlation technique was applied to explore the relationship

of corporate announcement and individual investors‟ investment behavior.

1.16. LIMITATIONS OF THE STUDY

1. The study covered only 30 companies, which were taken for calculating

Sensitivity Index of Bombay Stock Exchange. Other listed companies

were not taken for the study.

2. The study concentrates only on the corporate announcement of 30 listed

companies and not considers other information available in the market

during the study period.

3. In addition, the study focused only on the behavioural investment pattern

of individual investors in Tamil Nadu.

1.17. THESIS OUTLINE

The FIRST chapter introduces the research problem in general and focuses on

the actual problem of the research in the study area. The methodology is mentioned

in brief and it also mentions the corporate announcement with share price reaction

20

and individual investor‟s investment behavioural pattern in four major districts of

Tamil Nadu and also explains the methodology of the research, the nature of the

samples and the methods used to select the sample and the formulas used to collect

and interpret the samples.

The SECOND chapter deals with the literature related to the research problem.

The literature shows the evidence of the results which the researcher has found in the

study area, mainly focuses on the corporate announcement, share price reactions and

individual investor‟s investment behavioural pattern and the gaps in the earlier

research are mentioned in this chapter.

The THIRD chapter explains the significance of corporate announcement,

share price reactions, individual investor‟s investment behaviour and describes the

various types of corporate announcements.

The FOURTH chapter analyses the impact of corporate announcements on

reactions of security prices.

The FIFTH chapter evaluates the impact of corporate announcement on

individual investors‟ investment behavioural pattern.

The SIXTH chapter summarises the research findings and suggestions.

21

REFERENCES

1. Fama, E., (1970), “Efficient capital markets: A review of theory and empirical

work”, Journal of Finance, Vol. 25, pp. 383 – 417.

2. Beaver (1968), “The Information Content of Annual Earnings Announcements”,

Journal of Accounting Research, Vol.7, Pp. 67 – 92.

3. Foster T.W and Vickrey D (1978) “The Information Content of Stock Dividend

Announcements” Accounting Review, 53:2 (April) pp. 360-370.

4. Beaver, W., R. Clarke, and W. Wright, (1979), “The Association between

Unsystematic Security Percentage Change in Prices and the Magnitude of

Earnings Forecast Errors”, Journal of Accounting Research, Vol. 17, pp.

316–40.

5. Obaidullah. M, (1992), “How do Stock Prices React to Bonus Issues?,” Vikalpa,

pp 17-22.

6. Srinivasan.R (1997), “Security Prices Behavior Associated with Right-Issue

related Events” The ICFAI Journal of Applied Finance, Vol.3, No.3,

pp.71-81.

7. Jijo Lukose P. J. and Narayan Rao. S, (2002), “Does Bonus Issue Signal Superior

Profitability? A study of the BSE Listed Firms”. Downloaded from:

http://papers.ssrn.com/

8. Raja. M, Clement .J, Sudhakar and Selvam. M, (2009), “Testing the Semi-Strong

form Efficiency of Indian Stock Market with Respect to Information Content

of Stock Split Announcement – A study in IT Industry”, International Research

Journal of Finance and Economics, Issue 25, pp. 7 – 20.

9. Daniel, K., D. Hirshleifer, and A. Subrahmanyam, (1998), “Investor Psychology

and Security Market Under- and Overreactions,” Journal of Finance, Vol. 53,

pp. 1839-1885.

10. E.F. Fama, L. Fisher, M.Jensen, and R. Roll, (1969), “The Adjustment of Stock

Prices to New Information”, International Economic Review, Vol.10,

pp.1 – 21.

11. Brown, Stephen J., and Jerold B. Warner, (1980), “Measuring Security Price

Performance”, Journal of Financial Economics, Vol. 8, pp. 205-258.

http://papers.ssrn.com/

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