The impact of announcements of rights issues on the share prices of the companies traded on the Colombo stock exchange - an event study analysis

Abstract

Rights issue has been one of the popular ways of financing businesses in Sri Lanka. Financial literature has shown a considerable interest on the effects of this method of financing on shore prices. Many empirical studies conducted in developed and emerging markets have shown contradictory results. Some studies have found a negative effect while others have concluded no price effect for rights issue announcements. This study examines the effects of rights issue announcements on share prices traded on the Colombo Stock Exchange. Abnormal returns were calculated from daily share returns by using the market model benchmark; the most popular benchmark employed in the event studies. The findings showed that the announcement of rights has a negative effect on share prices; share prices suffered a drop throughout the test period. The results of this study also showed that Colombo Stock Exchange does not confirm to the semi-strong version of market efficiency hypothesis. No significant price adjustments were observed during the announcement period of rights issues.