This study examines the response of stock prices quoted on the Bombay Stock Exchange (BSE) to policy
pronouncements which affect the profitability of a particular industry or a group of firms. We have covered
three industries namely; the telecom sector, the banking and financing sector and the pharmaceutical
sector. We have studied the reaction of these industries to announcement of policy changes by the
Government of India. We have used the event study methodology to assess the speed and accuracy of stock
price reaction to public announcement. The results show that the stocks generally react to public news
quite quickly, but the first adjustment is not always the correct one. There is also a mild evidence of
presence of learning lag. However, these aberrations are not significant enough to be exploited to reach
at a profitable trading strategy.
The interpretation of daily stock price reaction to announcement of various news items
is a common thing in India. Analysts and researchers often comment about the behavior
of stock price because of a particular good or bad news. The reports appearing in the
financial press stand evidence to show that the same is also true for the Indian stock
market. The stock market crash in the second week of November 1994, when Sensex lost
about 250 points, has been attributed to the hike in the federal funds rate by 0.75% points
by the US Federal Reserve. Equity analysts argued that the debt markets became more
attractive than the equity market due to the above decision. As a result, FIIs booked profits
to take the funds out of the country and invest the same in US Government securities,
and hence the crash.
There are many studies documenting the evidence of market reaction of stock prices to
various news announcements such as Ball and Brown (1968), Brown (1970), Fama, Fisher,
Jensen and Roll (1969), Beaver (1980), Hagerman (1984), Ajinkya and Gift (1984), and Joy,
Litzenberger and McEnally (1977). There are several studies to quote from the Indian scenario
also. J Ramchandran (1988), Subramanium (1989) and Obaidullah (1990, 1991, 1992) are a
few worth mentioning. |
