Paper 19

-Journal of Arts, Science & Commerce E-ISSN 2229-4686 ISSN 2231-4172
AN EMPIRICAL ANALYSIS OF IMPACT OF RIGHT ISSUES ON

SHAREHOLDERS RETURNS OF INDIAN LISTED COMPANIES
Pooja Miglani
Assistant Professor
PG Deptt. of Commerce & Management
Apeejay College of Fine Arts, Jalandhar, Punjab, India
ABSTRACT
This study explores the impact of right shares issued by Indian companies that took place
during 2005 & 2010. The samples of 32 right issues have been used to study the announcement
effect. The study examines the stock price reaction to information content of right issues with a
view of finding whether Indian stock market is semi-strong efficient or not. The standard event
study methodology has been used for the purpose of examining the right issue announcement
reaction. The study reveals statistically significant abnormal returns on the announcement &
surrounding dates.
Keywords: Right Issue, Event study, Announcement date, Abnormal returns
International Refereed Research Journal www.researchersworld.com Vol. II, Issue 4,Oct. 2011 [169]
INTRODUCTION:
This paper is organized as follows: Section I includes this introductory exposition. It includes two parts. Part 1
specifies meaning of right shares & growth/quantum of right issues in India & Part 2 Reviews the pertinent
literature. Section II gives details of methodology. It further includes part 1 of data Sources & part 2 of data
Design. Section III presents empirical results & discussion & section IV gives the conclusion.
MEANING OF RIGHT SHARES & GROWTH/QUANTUM OF RIGHT ISSUES IN INDIA:

Right issues are the options given by a company to the existing shareholders to buy the shares of the company.
It is also known as right of Pre-emption. As per the Companies Act1956 whenever a company wants to issue
additional shares first of all these shares are to be offered to the existing shareholders. Though the motive of the
law is to ensure concentration of control in the hands of existing shareholders but shareholders avail the benefit
of it from cost point of view as well. They are offered shares at a price which is less than market price. Right
issue may have beneficial informational content. The share price may increase in response to this information &
affect the shareholders wealth. The study examines whether the Indian capital market reflects semi-strong
market efficiency. This form of efficiency implies that prices fully reflect all publicly available information.
REVIEW OF LITERATURE:
Numerous studies estimate the effects of announcements related to Bonus issues, dividend declaration, mergers
& acquisition on the stock prices of the firms involved in the process. In the present study the impact of right
issue announcement is analyzed & the pertinent literature in this context is as follows:
Ball, Brown & Finn (1977) examined stock price reaction around the announcement of stock capitalization
changes (bonus, stock issues, stock splits & right issues) in Australia for the period between 1960 &1969 using
monthly data. They found 20.2% abnormal return for 13 months up to & including the month of bonus issue
announcement.
Foster & Vickrey (1978) examined the signaling hypothesis of the information content of 82 stock dividend
announcements using data of daily returns. They found significant positive abnormal returns around the
announcement dates.
Lakonishok & Lev (1987) studied the trading volume changes after the announcement of stock dividend. They
researched the characteristics of the companies with stock dividends & without stock dividends. They
concluded that there is no significant increase in trading volume as a result of stock dividends & no significant
difference in the prices of two groups.
Lijleblom (1989) researched the signaling hypothesis by examining stock price reaction to stock dividends for
firms that also released simultaneous contaminating announcements. Findings indicated significantly greater
positive price reactions for the stock dividend- paying group than for the control group, which was interpreted
as support for the signaling hypothesis in the presence of contaminating announcements.
Spuma M. Rao (1997) studied the effect of announcement of Bribery, scandals, white collar crime & illegal
payment on returns to shareholders. The analysis shows that the actual stock prices for those companies were
lower than the expected market adjusted returns after the announcement.
Ahmed Sohrabian & Jeanni Kusaudi (1999) investigated the impact of insurance mergers on shareholders
returns. The results reveal that acquiring firms do not post any positive significant abnormal returns during the
announcement period while the target firms get positive significant abnormal returns.
Balachandran Bala Singham (2001) examines the share price reaction to announcement of bonus share issues of
Australian companies. They analyzed that the magnititude of price reaction to bonus issue announcements is
statistically related to the size of bonus issues & pre-announcement effect.
Mulugetta Abraham et al (2002) examined the impact of standard & Poors ranking changes on stock prices.
The study used the traditional market model & found statistically significant abnormal returns on the
announcement & surrounding dates.
Malhotra Madhuri et al (2003) provided evidence to support signaling hypotheses by examining the relationship
between bonus issue announcement & stock price reaction. The study concluded that there is a negative reaction
after the bonus issue announcement conveying that the market under reacts after the announcement.
Frank T. Delaney & Sam C. Wamuziri (2004) inferred the impact of mergers & acquisitions on shareholders
wealth. The overall results from their study indicate that related construction mergers create wealth for
shareholders of the target firm.
Xiaoww Huang (2004) analyzed the market reactions to financial announcement & provided the evidence that
announcement related to earnings can lead to excess returns.
Delaney T. Frank and Wamuziric C. Sans (2004) analyzed wealth effects from the construction mergers. The
study concluded that wealth effects from construction mergers are positive.
Mishra A K (2005) examined the stock price reaction to information content of bonus issue. The results
indicated significant positive abnormal returns for a five-day period prior to bonus announcement. The results
indicate stronger evidence of semi- strong market efficiency of the Indian stock market.
Chander Ramesh, Sharma Renuka, Mehta Kiran (2007) studied the informational content of dividend
announcement. The results showed average abnormal returns for capital asset pricing model around the
dividend announcement.
Vergos, Christopoulous & Mylonakis (2008) investigated the effects of political, economic, investment &
analysts report announcement on share prices of Hellenic telecommunication organization. The study found that
stock prices do not react to public announcement & continue to increase or decrease until 10 days after the
event.
METHODOLOGY:
This section is divided into two parts: Data sources & data design. The data sources section explains the criteria
applied in this study & data collection process. The data design section, on the other hand, describes the
procedure of event study conducted in this research. The research hypotheses examined in this study are tested
by applying an event study methodology described by Stephen J. Brown & Jerold B. Warner (1985).
DATA SOURCES:
The sample in the study consists of 32 companies which have announced the issue of right shares during the
period 2005 to 2010. In fact there are much more right issues during this period. But a sample is chosen on the
basis of criteria. The following are several criteria enforced in this study:
1. Shares of the company has to be traded publicly in BSE ( Bombay Stock Exchange)
2. The return on companys securities is available at least 90 days prior to 30 days after the announcement
date.
The information about the companies issuing right shares, their announcement dates are obtained from
Capitaline database. The individual firms security return & market return were also gathered from Capitaline
Database. Treasury bill rate were downloaded from RBI website. Values of the companies were also
obtained from Capitaline Database.
DATA DESIGN:
To examine the market response to right issue announcement standard event study methodology is used. The
ordinary least square (OLS) market model is applied for estimation of abnormal return on a specific stock. The
event study procedures in this study are gathered from previous researches by Bowman (1983) and Brown &
Warner (1980 & 1985).To construct an event study the event, event date, event window, estimation window &
estimation model should be determined. The event is what the researcher would like to study. The relationship
of the said event is studied with the share prices. The events defined for this study are the announcements of
right shares. The event date is the date of announcement of right issue by the sample firm. It can be expressed as
to. The event window comprises some period before & after the event day. The event window in this study is 30
days before & 30 days after right issue. It can be expressed as -30 to +30. The estimation period is the period
prior to the occurrence of the event. Generally estimation period & event windows are chosen in such a way so
that they dont overlap. The estimation period for this study is 90 days before to 31 days before the event date.
It can be expressed as t = -90 to t = -31. The selected examination model for this study is standard market model.
The model assumes that there is a linear relationship between the return of the security & the return of market
portfolio.
For the purpose of studying the impact of right issues on share prices abnormal returns are computed. Abnormal
returns are obtained by finding the difference between actual returns of the security j on day t & expected
returns of security j on day t. The following is the formula for OLS market model to compute abnormal
returns:-
ARjt = Rjt - ERjt

Where
ARjt = Abnormal return of security j on day t
Rjt = Actual return on security j on day t
ERjt = Expected return on security j on day t
Actual return on security j in period t is computed as follows:-

Pjt Pjt -1
Rjt =
Pjt -1
Where
Pjt = Price of security j on day t
Pjt-1 = Price of security j on day prior to day t
Expected return on security j in period t is computed as follows:-
ERjt = j + j Rmt
Where
j = Risk free rate of return i.e. Treasury bill rate of RBI
j = Relative riskiness of the security to market index i.e. BSE Sensex
Rmt = The rate of return on market index on the day t
After computation of abnormal returns of all the securities the average abnormal returns
(AARs) are computed during event period (-30 to +30). AARs are computed as follows:
N
1
AARt =
N
ARj =1
jt
Where
AARt = Average of abnormal return for day t
N = Number of securities in the sample
The abnormal returns are aggregated trading day wise & then divided by number of securities. Thus cross-
sectional & time- series aggregation is done. After this cumulative average abnormal return (CAARs) is
computed. The formula for CAARt:
t
CAARt = AAR
t k
i
Where
k = Number of event days before day t
T test is used to determine the statistical significance of CAARt & AARt. For computation of t statistics the
aggregate pre- event standard deviation of abnormal returns of all the securities is computed. Individual
companys pre- event standard deviation i.e. (from -90 to -31) is computed & then aggregation is done. The
formula for estimation of pre- event standard deviation of daily abnormal returns is as follows:
30
( AR
90
jt AAR pre ) 2
i, pre =
n
Where
i, pre = Standard deviation of abnormal returns of security i estimated from pre- event measurement period.
n = Number of days in pre- measurement period
AARpre = Average of abnormal return of security i estimated from pre- event measurement period
Aggregate pre- event standard deviation is computed as follows:-

i =1
2
i , pre
N , pre =
N2
i, pre is applied on AAR of each day. The t- test for AARs is as follows:-
AARt
AARt t stat =
N , pre
For testing CAARs, The t test formula is:-
CAARt
CAARt t stat =
N , pre N t
Where Nt = the absolute value of event day t plus 1 (e.g. for event day -30, the absolute value is 30 and Nt = 31)
A testable hypothesis is set. H1 : The null hypothesis being tested is that abnormal returns on & around right
issues are less than or equal to zero. If AARt or CAARt are greater than zero and statistically significant it
indicates that the stock prices on an average reacted positively to right issues. Thus lead to increase the wealth
of shareholders. If the t-test statistic is larger in absolute value than 1.96 or 2.58, the relevant abnormal return is
statistically non zero at 5% or 1% significance level respectively.
EMPIRICAL RESULTS & DISCUSSION:

The main empirical results are shown in Table 1. It presents the results of the entire sample consisting of 32
right issues. For each of the 61 days in the experimental period it reports the Average daily Abnormal Returns
(AARs) for days t-30 to t+30 along with the summary statistics for the tests of null hypothesis. The first column in
the table gives the event day while the second gives the average abnormal returns on the event day. The t
statistic values corresponding to the AARs are given in the third column. Column 4 shows Cumulative Average
Abnormal Returns ( CAARs). Last column indicates t-stat for CAAR.
Table 1: Average Daily Abnormal Returns, Cumulative Average Abnormal Returns & Respective Test
Statistics
Day AAR (%) AAR t-stat CAAR CAAR t-stat
-30 -0.39 -0.63 -0.39 -0.11

-29 -0.82 -1.3 -1.21 -0.35
-28 -1.66 -2.64* -2.87 -0.85
-27 0.47 0.75 -2.4 -0.72
-26 0.16 0.26 -2.23 -0.68
-25 -0.44 -0.7 -2.68 -0.83
-24 0.9 1.44 -1.77 -0.56
-23 -0.08 -0.12 -1.85 -0.6
-22 1.35 2.14** -0.5 -0.17
-21 0.86 1.37 0.36 0.12
-20 1.29 2.05** 1.66 0.57
-19 -0.01 -0.02 1.64 0.58
-18 0.27 0.43 1.91 0.7
-17 -0.73 -1.15 1.19 0.44
-16 0.35 0.55 1.53 0.59
-15 0.58 0.92 2.11 0.84
-14 -1.02 -1.62 1.09 0.45
-13 -0.57 -0.91 0.52 0.22
-12 0.8 1.26 1.31 0.58
-11 1.64 2.6* 2.95 1.35
-10 -0.11 -0.18 2.84 1.36
-9 -0.87 -1.38 1.97 0.99
-8 -0.94 -1.5 1.03 0.54
-7 -0.43 -0.68 0.6 0.34
-6 -0.65 -1.03 -0.05 -0.03
-5 0.12 0.19 0.06 0.04
-4 -1.64 -2.61* -1.58 -1.12
-3 -0.49 -0.78 -2.07 -1.65
-2 1.42 2.25** -0.65 -0.6

-1 0.5 0.8 -0.15 -0.17
0 0.89 1.42 0.74 1.18
1 1.43 2.27** 2.17 2.44**
2 1.68 2.67* 3.86 3.53*
3 -0.35 -0.56 3.51 2.78**
4 -0.75 -1.19 2.76 1.96**
5 0.53 0.84 3.29 2.13**
6 0.04 0.07 3.33 2**
7 -0.09 -0.14 3.24 1.82
8 0.65 1.03 3.89 2.06**
9 0.44 0.71 4.34 2.18**
10 -0.67 -1.06 3.66 1.75
11 -0.64 -1.02 3.02 1.39
12 -0.74 -1.18 2.28 1.01
The symbol * denotes statistical significance at 1% level & ** denotes statistical significance at 5% level.
Table 1: Average Daily Abnormal Returns, Cumulative Average Abnormal Returns & Respective Test
Statistics
Day AAR (%) AAR t-stat CAAR CAAR t-stat
12 -0.74 -1.18 2.28 1.01
13 1.52 2.41** 3.08 1.61
14 -1.39 -2.2** 2.42 0.99
15 0.19 0.3 2.6 1.03
16 1.01 1.6 3.61 1.39
17 0.01 0.02 3.62 1.35
18 1.12 1.78 4.74 1.73
19 1.11 1.77 5.85 2.08**
20 1.56 2.48** 7.41 2.57**
21 -0.51 -0.81 6.9 2.34**
22 0.03 0.05 6.93 2.29**
23 -1.25 -1.99** 5.68 1.84
24 -0.82 -1.31 4.85 1.54
25 1.06 1.68 5.92 1.84
26 2.1 3.34* 8.02 2.45**
27 -0.34 -0.54 7.68 2.3**
28 1.7 2.7 9.38 2.76*
29 0.72 1.15 10.1 2.93**
30 0.14 0.22 10.24 2.92**
The symbol * denotes statistical significance at 1% level & ** denotes statistical significance at 5% level.
The table shows that for the 30 days before the announcement date there is no consistent pattern of abnormal
returns of the companies engaging in right issue. The AARs before the announcement period (-30 to -1 day) are
positive only for 14 days out of 30 days and are negative for 16 days. AARs are significant at 1 % level of
significance on days t-28, t-11, t-4. AARs are significant at 5 % level of significance on days t-22, t-20, and t-2. On
the other days before announcement date there are no significant abnormal returns for the stockholders of the
sample companies. The AARs after the announcement date show no consistent pattern. After the announcement
date for 11 days there were negative returns & for 19 days there were positive returns. AARs are significant on
t+2, t+26, and t+28 at 1% level of significance. Returns on day t+1, t+13, t+14, t+20 and t+23 are significant at 5% level of
significance.
The analysis of CAAR shows that during pre-event window on 14 days CAAR was negative & on 16 days it
was positive, indicating the positive reaction of the market in anticipation to right shares. But CAARs before
announcement day are statistically insignificant. The pattern of CAAR is inconsistent from t-30 to t-1. However on
announcement day there was an increase in CAAR from -0.15 to 0.74. After the event date CAAR is positive.
CAAR is significant at 1% on t+2, t+28, t+29, t+30. It is also depicting significant cumulative average abnormal
returns at 5% level on day t+1, t+4, t+5, t+6, t+8, t+9, t+19, t+20, t+21, t+22, t+26, t+27. This indicates a positive impact of
right issues on the firm.

Some sub- tables are extracted from Table 1 regarding CAAR. They are in relation to 11 days around event day,
21 days around event day & 41 days around event day.
Table 2: T- Test Statistics On The Cumulative Abnormal Returns For 11 Days Around The Event Date
Days Values of test-statistic
-5 to -1 -0.153
+1 to +5 4.037*
-5 to +5 5.3*
The symbol * denotes statistical significance at 5% level.
Table 3: T- Test Statistics on the Cumulative Abnormal Returns for 21 days around the event date
-10 to -1 -4.925*
+1 to +10 4.64*
-10 to +10 1.130
Table 3: T- Test Statistics on the Cumulative Abnormal Returns for 41 days around the event date
-20 to -1 -0.815
+1 to +20 10.58*
-20 to +20 11.18*
The above tables show insignificant CAARs in the interval of days -5 to -1 & -20 to -1. However it is also
depicted that there is significant positive CAARs in the interval of +1 to +5, -5 to +5, +1 to +10, +1 to +20 & -
20 to +20. During the interval -10 to -1 significant negative returns are seen. It implies that market incorporated
the information & reacted positively to right issue announcement.
CONCLUSION:
This paper has examined the impact of right issue on firms equity value. Data analyzed in this study consist of
a sample of public announcements of right issues by companies. To be included in the sample the
announcement of right issue must be reported during 2005-2010 period. Using the standard event study
methodology the analysis shows that actual stock performance for the companies was higher as compared to
expected market adjusted returns. The results showed that the stock value of the firm increased on the day of
announcement of right issue by about 1.42%. The study also reveals statistically significant abnormal returns on
the announcement & surrounding dates.
REFERENCES:
[1] Brown, S. & Warner, J. (1983), Using daily stock returns: the case of event studies, Journal of
Financial Economics, March, pp 3-31.
[2] Chander Ramesh, Sharma Renuka, Mehta Kiran (2007), Dividend announcement & Informational
efficiency: An empirical study of Indian stock market, The ICFAI Journal of applied Finance, Vol. 13,
October, pp 29-42.
[3] Vergos P. Konstantinos, Christopoulos G. Apostolos & Mylonakis John (2008), The impact of
publicity announcement on share prices: An empirical study, ICFAI Journal of Management research,
Vol VII, March, pp 35-55.
[4] Balachandran Balasingham & Tanner Sally (2001), Bonus share issues & announcement effect:
Australian evidence, Australian Economic paper, Vol 44, No. 3, pp 248-268.
[5] Rao Spuma M. (1997), The effect of announcement of Bribery Scandal, White collar crime & illegal
payment on returns to shareholders, Journal of Financial & strategic Decision, Vol 10, pp 55-62.
[6] Mulugetta Abraham et al (2002), The influence of Standard & Poors ranking changes on stock price
performance, Managerial Finance, Vol. 28, pp 19-30.
[7] Malhotra Madhuri, Dr. Thenmozhi, M., Dr. Kumar G. Arun, Stock Market reaction & liquidity changes
around bonus issue announcement: Evidence from India, 10th Capital Markets conference, Indian
Institute of Capital markets paper, pp 1-12.
[8] Mishra, A. K. (2005), The empirical Analysis of Market reaction around the bonus issues in India, The
ICFAI Journal of applied Finance, August, pp 21-37.
[9] Huang Xiaowu (2004), China Stock price reactions to financial announcement: Evidence from
Segmented markets, Managerial Finance, Vol. 30, November, pp 62-73.
[10] Ball, R., Brown, P. and Finn, F.J. (1977), Share capitalization changes, information and the Australian
equity market, Australian Journal of Management, Vol. 2, pp 105-125.
[11] Foster, T. W. and Vickrey, D. (1978), The information content of stock dividend announcement,
Accounting Review, Vol 53, No. 2, pp 360-370.
[12] Lijleblom, E. (1989), The informational impact of announcements of stock dividends & stock splits,
Journal of Business Finance & Accounting, Vol 16, No. 5 , pp 681-698.
[13] Lakonishok and Lev (1987), Stock splits & stock dividend; why, who & when? Journal of Finance,
Vol 42, No 4, pp 913-932.
[14] Delaney, T. Frank and Wamuziri C. Sam (2004), The Impact of mergers & acquisitions on
shareholders wealth, Engineering Construction and architectural management, Vol 11, No. 1, pp 65-73.
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-Journal of Arts, Science & Commerce E-ISSN 2229-4686 ISSN 2231-4172

AN EMPIRICAL ANALYSIS OF IMPACT OF RIGHT ISSUES ON

Keywords: Right Issue, Event study, Announcement date, Abnormal returns

MEANING OF RIGHT SHARES & GROWTH/QUANTUM OF RIGHT ISSUES IN INDIA:

ARjt = Rjt - ERjt

Actual return on security j in period t is computed as follows:-

Aggregate pre- event standard deviation is computed as follows:-

EMPIRICAL RESULTS & DISCUSSION:

-30 -0.39 -0.63 -0.39 -0.11

-2 1.42 2.25** -0.65 -0.6

right issues on the firm.

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