Submitted by :-

Jitendra Kumar

Testing the Semi-Strong form Efficiency of Indian Stock Market

with Respect to Information Content of Stock Split

Announcement (2010)

IntroductionEfficient Market Hypothesis - At any

given time, security prices fully reflect all available information.

Information is quickly and efficiently incorporated into asset prices at any point in time, so that old information cannot be used to foretell future price movements.

Capital Market Efficiency• Three versions of EMH depending upon the

level of available information are :– Weak form EMH• The information contained in the past sequence of

prices of a security is fully reflected in the current market price of that security.

– Semi Strong form EMH• All publicly available information is fully reflected in

a security's current market price

– Strong form EMH• All private information or insider information too, is

quickly incorporated by market prices and therefore cannot be used to reap abnormal trading profits.

ObjectiveTo know the efficiency of Indian Stock

MarketTo determine if the securities in the market

are appropriately priced.How quickly and correctly security prices

reflect the information content of events.

Relevance of the Study • The present study tests the efficiency of the

Indian Stock Market w.r.t information content of stock splits by Indian Comapanies

• Corporate event announcement information and stock market efficiency are of greater interest to – the investors– fund managers– Analysts– planners– policy makers– Market regulators – Accounting standard setters– Researchers – the government and the public in general

Hypothesis of the StudyThe following hypotheses are to be tested

in this study :Stock split announcement contained

information‘s are not relevant for the valuation of stocks.

Stock split announcement has no significantly influence in the stock prices of companies.

• Sample Selection

– The study covers all the stock splits for companies listed in National Stock Exchange (NSE) for the year 2010.

– All the companies for which the following data was available formed the part of the study:-• Availability of the dates of announcement of stock split, and • Availability of stock split information

• Sources of Data

 – The information regarding adjusted share price, Stock

split information, dates of stock split announcements, and values of NSE were obtained from “PROWESS” published by CMIE.

– Other relevant information are also obtained from the NSE website http://www.nseindia.com/) books, and journals.

Methodology

A) Calculation of Actual Returns – Actual returns were calculated by using the data gathered from the NSE website. The logarithmic returns are taken into consideration

 Ret = ln((SP t ) / SP t-1) Where Ret = return for a particular day

SP t = Stock Price of that particular daySP t- 1 = Stock price of previous day

TULIP Normal Return950.45959.55 0.00952887940.7 -0.0198401931.5 -0.0098281932 0.00053662

931.75 -0.0002683940.4 0.00924078948.95 0.00905079

962 0.013658341011.35 0.05002691001.05 -0.0102366

• Determination of Regression Coeffecients – Regression analysis was applied in which the NSE returns formed the independent series and the actual returns calculated in first step formed the dependent series. The value of the coefficients (a) and (b) of the regression equationReturn on Stock = a + b ( Return on NSE)

  df SS MS F Significance F

Regression 1 0.000311182 0.000311 2.002245 0.160677212

Residual 86 0.013365809 0.000155

Total 87 0.013676991     

  Coefficients Standard Error t Stat P-value Lower 95%Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.002062972 0.001329751 1.551397 0.124479 -0.000580485 0.004706 -0.00058 0.004706

X variable 0.174122512 0.123054155 1.415007 0.160677 -0.070501047 0.418746 -0.0705 0.418746

Lupin regression coeffs

• Calculation of Expected Returns – Expected returns were calculated by using the regression equation formed in the previous step

• Calculation of Abnormal Returns – The difference between the actual and the expected returns gave the abnormal returns.

Normal Return Expected Return Abnormal Return   

-0.0297712 -0.0149168 -0.01485440.01106206 0.00921702 0.001845040.00839881 -0.0060872 0.014485960.01569438 0.00744577 0.0082486-0.027767 -0.0097563 -0.0180107

0.00165487 0.02899504 -0.02734020.04893888 0.01823825 0.030700630.02470968 0.00146998 0.02323970.04879829 0.01116341 0.037634880.02741655 0.00351966 0.02389689-0.0085769 -0.0026108 -0.00596610.01770797 -0.0080351 0.0257431

• Cumulative Abnormal Return – The abnormal return for ten days before and after the day of stock split announcement were added to obtain the cumulative abnormal return.

Abnormal Return                                                  CAR-0.025097 -0.0147717 -0.005081 -0.0062324 -0.0099172 -0.0060909 0.00351975 0.01005909 0.04990742 

-0.03416 (Day of announcement) 0.00617618 -0.072632

-0.0381894 0.02994961 0.0221955 -0.0238718 -0.0375033 0.00607446 -0.0329681 -0.0055408 0.02193003 0.01697944 

• Maximum variation of the actual returns from the expected returns was found to be on day 7 for all the stocks under consideration.

• The volatility was quite high for the initial days after the day of announcement and it gradually settled and again became normal eighth day onwards .

AnalysisCOMPANY NAME

CAR VALUE(-10 to +10)

Independent samples t-Test

LUPIN LIMITED -0.084317953 0.01376913

HDFC LIMITED -0.049731559 0.445874632

JAYSHREE TEA & INDUSTRIES 0.073458555 0.229961311

EMAMI LIMITED 0.073604619 0.2081266

TATA TEA LIMITED 0.071506701 0.326991133GENESYS INTERNATIONAL CORPORATION LIMITED 0.007315499 0.330710229

VIPUL LIMITED 0.085246063 0.613336879

MAHINDRA & MAHINDRA LTD -0.086797899 0.680017873MURLI INDUSTRIES LIMITED 0.052379639 0.532590032

KRBL LIMITED 0.089903269 0.677572272BAJAJ ELECTRICALS LIMITED -0.009524414 0.390363869

Analysis The Cumulative abnormal return for Magma Fincorp, IPCA Labs,

Consolidated Construction is higher in comparison to the rest of the companies

It shows that the market was not perfectly efficient in absorbing the news of stock split for these stocks.

The CAAR value which signifies the efficiency levels of the market has turned out to be 0.010 which is very close to zero implying that the market was efficient w.r.t stock split announcement for the year 2010.

The T-test was performed between the expected returns & the actual returns of the stocks for a period of 10 days starting from the announcement date.

Null hypothesis being that there is no significance difference between the two series.

The p value of the t test is less than 0.05 in case of Lupin Limited & S. E. INVESTMENTS LIMITED.

In the rest 20 companies the null hypothesis was accepted hence we can say that the market is efficient w.r.t. stock split.

ConclusionThe CAAR value of 0.01(close to 0) and 19 companies

in accordance with the null hypothesis support the points mentioned.

Study has empirically examined the informational efficiency of Indian stock market with regards to stock split announcement released by the companies listed on NSE for the year 2010.

The result of the study showed the fact that the security prices did not react to the announcement of stock splits. The reaction took place for a very few days surrounding day 0.

We conclude that the Indian stock markets in general are efficient, to the announcement of stock split.

Thus an investor cannot get abnormal returns by making use of the announcement of stock split.  

THANK YOU