An empirical study on announcement effect of right issue on share price volatility and liquidity and its impact on market wealth creation of informed investors in Bangalore with special reference to cnx nifty stocks of NSE

This paper investigates the market reaction to rights issue announcement news, using a event study methodology for Nifty stocks from 1995 to 2011 and also examines neglected firm hypothesis, Price pressure hypothesis. There are several theories that have been advanced to explain why companies go for right issue. In previous studies, it is evident that stock returns are significantly affected negatively or positively around rights issue announcement dates. Loderer and Zimmermann (1988) and, Hou and Meyers (2002 find insignificant average abnormal returns, which indicate that there are no announcement effects. The purpose of this study is to test whether the investor can gain or lose an above normal return by relying on public information impounded in a rights issue announcement. Using risk adjusted event study methodology, this study tests where there is excessive abnormal return exists during event window of announcement. Rights announcement sample observations S&P Nifty INDEX were analyzed using standard risk adjusted event study methodology. The event study methodology was employed in the determination of the effects of the rights. Abnormal returns were calculated by use of the market model and t-tests are conducted to test the significance. We find the no evidence of existence of significant positive abnormal returns on AD 0. The event has reported negative ARR of -0.048 and it is statistically insignificant. It is also oberserved that there is no significant change in trade volume for the observations stocks during event window. The study concludes that the Indian market reacts negatively to rights issue announcement.