Examining Overreaction in BSE using Event Study Approach for Stock Split Announcements

If stock market shows abnormal price movement because of any news or event followed by a correction in reverse direction can be evidenced as market overreaction. The question of whether or not Indian stock prices market say BSE (Bombay Stock Exchange) is overreacted during any stock-specific news is best answered by a comprehensive and concurrent analysis of the various tests and data available while using the event study, like stock and market-specific data.

The present study would deviate from the previous findings in various ways. Earlier studies document that prediction capability is more in the case of larger firms (Lev and Penman, 1990). The question nurtured by this study is based on the opinion that small firms (being less experimental) may have a better chance of attracting reaction of the rare event of stock split announcement than a large firm which is always monitored any type of market condition. We find how the smaller firms and larger firm's overreaction vary with market condition or market uncertainty or volatility to firm-specific news. Finally, we want to address the impact of size, volatility and asymmetry in the terms of investors’ overreaction to the firm-specific news not only individually but also jointly of size and volatility, size and news and news and volatility.

The outcome of this study helps to solve the problem concerning the extent to which stock split announcements have informational content, and whether the investors are affected by the signals. It may so happen that market-players act differently to stock split announcements during different market volatility conditions of various firms of various sizes in different firmspecific news-good, bad or no news. It also answers the way of reaction for the case of small vs. large firms in the most advantageous manner. The present study substantiates the policy recommendation for the market players as well as for the analysts in estimating stock split announcement events under different market condition and different market capitalization value of the firm.