Academic journal article South Asian Journal of Management

Stock Price Response to Firm Specific Events: Indian Evidence

Academic journal article South Asian Journal of Management

Stock Price Response to Firm Specific Events: Indian Evidence

Article excerpt

This research is a study of the impact of firm specific announcements providing information on technological developments like patents, research achievements and new product introductions and corporate news related to joint ventures, mergers and acquisitions and change of top executives on the Indian capital market. The study assumes academic significance, as there is no evidence of investor response to firm specific events other than announcements of earnings, rights, bonus and dividends in India. The results found from standard event study procedures are in general agreement with the extant empirical evidence reported in various literatures, indicating that the Indian stock market also conforms to the Efficient Market Hypothesis (EMH) whereby the investors exhibit an informed and rational behavior.

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The Indian economy has taken on a new meaning ever since the country decided to globalize her markets and liberalize her trade policies, way back in 1991. Since then she has witnessed a steady evolution of corporate research environment and a sophisticated market capable of appraising the technology and other strategic aspects of a firm. This study has been attempted with a view to avail of the opportunity to observe and analyze the behavior of the Indian stock market valuation of a firm in response to various developments pertaining to technology and business during this time.

The value of a firm is a dynamic variable, ever changing under the influence of various economic activities, both internal as well as external to the organization. In academic literature, these economic activities are termed as events, which are examined with respect to stock price movements in order to determine their effect on firm value. Such studies are known as Event-Studies, which try to measure the effect of an event as reflected immediately in asset prices, given rationality in the marketplace.

In both accounting and finance, event-study methodology has been applied to a variety of firm-specific and industry-wide events. In finance, the main interest has been whether prices adjust in a rapid and unbiased manner to new information. In accounting, the focus has been more on whether different accounting disclosures have information content, Jennings and Stark (1985). When the events pertain to macro economic issues, the effects are experienced across the industries, whereas, events pertaining to microeconomic factors specific to a firm, affect the valuation of that firm. Some examples include Mergers & Acquisitions (M&As), earnings announcements, issues of new debt/equity, etc.

Moreover, event-studies find application in fields other than accounting and finance as well. To cite a few of such papers, we may consider the reports on stock price reactions to release of data on pollution, Hamilton (1995), evidence of stock price increase for firms winning quality awards, Hendricks and Singhal (1996) and impact of e-commerce initiatives on the value of the firm, Subramani and Waiden (2001).


This paper focuses on the behavior of the Indian stock market when responding to various firm specific news regarding technological developments and corporate decisions. The Indian economical setup went through a large scale revamping since the globalization of markets in 1991. To investigate these changes, various firm-specific events pertaining to technology and corporate news were chosen for this study. Technology announcements are comprised of announcements on Patents, Research Achievements and New Product Introductions, whereas, Corporate Announcements consider events related to Joint-Ventures/Alliances (JV/As), M&As and Changes of Top Executives. Though such firm specific events have not been studied in the Indian context, there exist extensive empirical evidence for such events from the developed markets like US and Europe. …

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