Impact of Selective Corporate Events on Price Movements of Stocks of Bank Nifty Index

There are a number of reasons behind the fluctuations of share price in every trading day. Corporate actions of the companies do play a major role in the fluctuations of the share prices. An investor takes decision to buy or sell securities on the basis of their interpretation about corporate events. An attempt is made in this study, to know the impact of corporate announcement on the share prices of stock composition of Bank Nifty Index. The price movements of share before and after the corporate announcements were collected and Non Parametric Test (Wilcoxon Matched pairs Test) was applied to know the impact. The study has revealed that there is a significant impact on price movements of shares and it gives the chance to an intelligent investor to make profit from it. INTRODUCTION Fluctuations in share prices are inevitable in stock markets. We are witnessing more fluctuations in the price of shares in every trading day. These fluctuations happen due to various reasons. The reasons may be either due to systematic risk and/or unsystematic risk. Corporate actions of company do play a major role for the fluctuations in the share price. Traders and Investors may view the corporate events either in positive or negative way. They buy or sell securities on the basis of their interpretations about the corporate events. As a result, fluctuations in the share price occur. There are various types of corporate events like bonus issue, buy back of shares, stock split, dividend declaration, rights issue, preferential issue, employees stock option program, mergers and acquisions, change of leadership, labour unrest etc. Event study is an important activity in making investment in stock market. The goal of an event study is to understand and measure the effect of an economic value of a firm, and the effect of an event that will be reflected immediately in the share prices. An attempt is made in this study to understand whether the corporate event influences the prices of shares significantly or not. For this purpose of the study, stock composition of Bank Nifty Index is considered. It consists of 12 stocks and they are Bank of Baroda, SBI, Canara Bank, Kotak Mahindra Bank, PNP, HDFC Bank, Bank of India, ICICI Bank, Union Bank, Yes Bank, Axis Bank and Indus Ind Bank. The corporate events selected for studying the price fluctuations are bonus issue, rights issue, stock split, declaration of dividends, ESOPs and preferential issues. To measure the impact of corporate events on share price fluctuations, Wilcoxon Matched Pair Test method is applied. REVIEW OF LITERATURE A study was conducted by Ball and Brown (1968)1 and it was observed that after earnings are announced, estimated cumulative abnormal returns continue to drift up for good news firms and down for bad news firms. In a study by Watts (1978)2it was found that significant abnormal return exists after the earnings announcement and it is because of the fact that stock market inefficiencies cannot be attributed to deficiencies in the capital asset pricing model.David Yermack (1987)3 studied the stock option awards and company news announcements of chief executive officers. He found that the timing of the awards has significant association with contemporaneous movements in company stock prices. A study on the impact of dividend and earning announcement and return volatility was conducted by P.C. Venkatesh (1989)4.In his study he concluded that the volatility of daily returns are lower in the post dividend period. Alexander Hamilton Frey (1991)5conducted a study on the distribution of corporate dividends. The study revealed that the theory of dividend credit is not limited to cumulative and noncumulative preferred shares. In a study by Srinivasan (1993)6, it was observed that there was a positive abnormal returns on Ex-bonus and Ex-rights dates for Indian stock market. A study was conducted by Anand.M. Vijh (1994)7 to measure the Ex-date effect of Spin-off and Mergers. The study concluded that mergers effect of Ex-date returns are much smaller fraction than the expectation of the shareholders and they gain. Rao (1994)8 found out in his study that the Indian equity market responds in an expected direction to the firms’ corporate event announcements. He projected a cumulative abnormal positive return of 6.3 percent around the three days of bonus issue announcement.In a study by Mishra (2005)9, it was found that there is a significant positive abnormal return for the five day period prior to bonus announcement. A study by Amitabh Gupta (2006)10 titled “Share price behaviour around buy back period in India” reveals that the announcement of shares buyback significantly increases the prices of of shares around the time of announcement and larger companies generate lower abnormal returns than small companies. A study by Selvam, Babu and Indumathi (2010)11 reveals that the dividend announcement makes a positive impact on the share prices of the companies that came for dividend announcement in the Indian stock exchanges and it gives the scope for intelligent investor to earn superior return. A study by Koustubh Kanti Ray (2011)12 titled “Stock split and Right issue effect on Indian stock Market” concludes that the efficient market hypothesis failed to prove efficiency in India concerning the stock split and rights announcement where investors can make abnormal return. NEED FOR THE STUDY There are number of researches on event studies in stocks of Indian equity market and most of the studies commonly examine the behaviour of the share prices of the firm around the corporate announcements. From the literature given above, it is evident that most of the studies have taken only one or two corporate events as base event for finding out the impact of share price movements and the investigation window period is also very small in number. So these studies reveal the short term impact on share price movement and impact due to one or two corporate events as base events. Hence, to find the sustained impact, the researcher has taken the estimation window period from -30 trading days to +30 trading days (“0”day-Event day) and corporate events numbering six as base events for the purpose to find the impact on price fluctuation of shares in this present study.