Abstract: The project is done to find out the impact of stock split on the stock market. In our project, we have made use of event study methodology to assess the accuracy of stock price reaction of 39 public listed Indian companies in National Stock Exchange (BSE) in the year 2006 and onwards. The abnormal returns (actual returns-returns from regression line) results were taken for 20 days before and after the announcement date to test whether the result is significant or not (Level of significance=5%). The project shows that there is no significance difference in the price level before the announcement date while after the announcement date, there was a significant difference in the price level for few days(level of significance being 5%) The project supports the hypothesis that Indian stock market is semi strong efficient. Efficiency of stock market: Market efficiency signifies how “quickly and accurately” does relevant information have its effect on the asset prices. Depending upon the degree of efficiency of a market or a sector thereof, the return earned by an investor will vary from the normal return. The efficient market hypothesis states that it is not possible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future. Introduction: An Event study uses transactions data from financial markets to predict the financial gains and losses associated with newly disseminated information. For example, the announcement of a merger between two firms can be analyzed to make predictions about the potential merger-related changes to the supply and the price of the product(s) subject to the merger Event studies seek to analyse the impact of a specified class of events on the prices of securities. The most widespread use of the event study is in testing the Efficient Market Hypothesis (EMH). Efficiency is demonstrated by showing that the market response to an event takes place either before the event or very shortly after the event - information is either anticipated or very quickly assimilated. The pioneering work on event study was done by Ball and Brown (1968) and Fama, Fisher, Jensen and Roll (1969) (henceforth referred to as FFJR). The methodologies used in these studies have become a standard technique for testingThe EMH. Over the last two decades a variety of events such as announcement of stock splits, announcement of earnings, mergers and takeovers have been studied by researchers for examining market efficiency.
The purpose of this paper is to attempt to recompile information about the merger of two corporations; one of many taking places i...
The events that unfolded on September 11th and the days that followed also profoundly effected the stock market. It is the purpose of this paper is to examine what happened to both the Dow Jones Industrial Average and the NASDAQ after September 11th and how it is similar to events such as the bombing of Pearl Harbor, the Oklahoma City bombing, and the Gulf War in terms of how the stock market experienced a blow and bounced back after a while.
This report examines the existence of trends in the Australian share market with respect to the effect of profit announcements in the mining industry; specifically the effect on BHP Billiton. The price index of BHP Billiton and two of its competitors, namely Rio Tinto and Fortescue Metals Group, on the Australian Stock Exchange has been recorded for 3 weeks before and 3 weeks after a profit announcement in order to facilitate an investigation into investor behaviour following the release of accounting information. Closer examination of BHP Billiton’s internal management and wider external economic forces have also been in order to better predict the market’s reaction before analysis of the actual reaction of investors. Key factors, including the improvement of cash flows in and out of BHP, change in accounting standards and an increase in leverage are integral in assessing the effect a profit announcement on an industry that has previously been in gradual decline. Ultimately it has found to be a combination of these factors, in addition to a change in political circumstances that can be attributed to an increase in stock price following the profit announcement.
Second, the efficient market hypothesis cannot explain market anomalies. These market anomalies include the pricing/earnings effect, the size and January effect, the monthly effect, holiday effect and the weekend effect. These anomalies indicate either market ineffici...
Efficient Market Hypothesis is an important step on predicting the future price of the stocks or securities in short-term. By applying the new information in order to react to the business can help to identify the direction of the stock price and gain return. Although the result may fail the investor in long-run but for the investors who intend to invest in short-run are still useful. React to the favourable or unfavourable information for the company can help to adjust the overprice or under priced stocks in order to maintain the balance in the market. Since the EMH can still be the basis of the prediction of the stock price, EMH is still viable for the investors to study and examine before the investment.
We analyzed the market for two weeks to determine when the equity market would turn from a bearish to bullish market. Without a change in the market and a declining bond price, we decided to invest in equities according to our investment strategy, which brought us into the second phase of our portfolio. Therefore, at the beginning of February we bought shares in Sirius, Microsoft, Neon, Washington Mutual, and Nike. As assumed, the equity market continued to plummet decreasing the value of all our stocks except for our Gold Corporation stock.
According to Perold (2004), ‘CAPM can be served as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescript...
...emakdej (2007) carried out a research of 100 splits in the Stock Exchange of Thailand and detected significantly negative impact 20 days before and 18 days after the ex-date of the stock split. This was the comparison with other studies that noted positive abnormal returns around the stock split dates. There was also an increase in both the proportion of large shareholders and the number of investors. Trading volumes were found to be lower than before. This study also found the evidence that the systematic risk was lower during the ex-dates but returned to preceding level after the stock split. Another have noted that abnormal returns were found only in the first year after the declaration of the stock. It was also noted that the significant abnormal returns only occurred during the period of 1975-1987 because of lower systematic risk in the New York Stock Exchange.
Week 5 Lecture. (2006). FIN 325 Mergers, Acquisitions, and International Finance. Retrieved from rEsource on July 7th, 2006 from https://ecampus.phoenix.edu/secure/resource/resource.asp
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.
Stock market prediction is the method of predicting the price of a company’s stock. It is believed that stock price is lead by random walk hypothesis. Random walk hypothesis states that stock market price matures randomly and hence can’t be predicted. Pesaran (2003) states that it is often argued that if stock markets are efficient then it should not be possible to predict stock returns. In fact, it is easily seen that stock market returns will be non-predictable only if market efficiency is combined with risk neutrality. On the other hand it is also been concluded that using variance ratio tests long horizon stock market returns can be predicted....
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.