Description
Indian firms which tests the efficient market hypothesis to see if it is actually possible to achieve a positive, significant and abnormal return, with the announcement of a company takeover.
1. 2. 3. 4. 5. 6.
EMH Versions Aim of the study Case - ICICI Case - Fortis Case - RIL Conclusion
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
They differ in what is meant by “all available information”
?
Weak form
? It is impossible for an investor to achieve a positive abnormal return by using past information on stock prices
?
Semi strong form
? Market that fully reflects all public information, making an investor unable to outperform the Market
?
Strong form
? It is expected that any type of information – private or public - that may be relevant to the value of a stock, even if it is only known by one investor, will already be adjusted for in the Market.
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
?
Efficient Market Hypothesis states that investors should not be able to earn above normal returns in the Market, due to the fact that the Market operates with all pertinent information taken into account. Event study tests this particular hypothesis to see if it is actually possible to achieve a positive, significant and abnormal return, with the announcement of a company takeover The different forms efficient market hypotheses which test an investor’s ability to earn a positive abnormal return on the basis of takeover announcements are examined here
?
?
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
1.
2.
All of the information about the stock price and market price within the duration of -181 days to +30 days is attained. The time period from Day -30 to Day 30 is referred to as the event period. The holding period return for the firms (R) and the market (Rm) will be calculated by using the following formula:
R = (Current day close price - Previous day close price) /Previous day close price
Rm
=(Current day market close price - Previous day market close price) /Previous day market close price
3.
A regression analysis was performed comparing the actual daily return of each company to the Market daily return
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
4. Find the intercept alpha and the standardized coefficient beta 5. The Excess/Abnormal Return (ER) was calculated using: ER = the Actual Return (R) – Expected Return E(R)
Statistical importance To isolate the impact of the event on the share price
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
“Taming the Camel”
1
EMH Aim & Meth ICICI Fortis RIL Conclusion
? ?
On 18 May 2010, ICICI announced takeover of Bank of Rajasthan Small gradual increase in CAR prior to the announcement date
? Implication: Low information ‘leakage’ prior to announcement ? Ideal case: jump in CAR only on announcement date
• Significant rise in CAR after announcement
• This increase in abnormal returns was short lived & CAR stabilized soon
? ? Implications: This is in accordance with efficient market hypothesis that once new information comes to the market, investors react quickly With prices once again fairly set, further abnormal returns are equally likely to be positive or negative
? Implication: Investors view the acquisition as favourable for the company
• As is typical, there was a spurt in volumes on the date of announcement indicating increased activity in the stock
EMH Aim & Meth ICICI Fortis RIL Conclusion
CAR
1 0.8 0.6 0.4 0.2 0 3/13/2010 3/23/2010 -0.2 4/2/2010 4/12/2010 4/22/2010 5/2/2010 5/12/2010 5/22/2010 6/1/2010 6/11/2010 6/21/2010 7/1/2010 CAR
Volume
16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
2
EMH Aim & Meth ICICI Fortis RIL Conclusion
?
?
The news of Fortis acquiring Wockhardt was released on June 6, 2009. Great increase in CAR prior to the announcement date
? Implication: Information ‘leakage’ prior to announcement ? Ideal case: jump in CAR only on announcement date
? 1. 2. 3.
This could be because of following reasons: Insider trading norms not perfectly obeyed/enforced Before actual takeover, public becomes suspicious that such an event may occur Any news of a takeover does not happen all of a sudden on one day. It is spread over a period of time. Therefore there are spikes in the stock price movement indicating market reaction as and when new information comes
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
Cumulative abnormal return for Wockhardt
0.4 0.35 0.3 0.25
0.2 0.15 0.1 0.05
0 -0.05 28-Mar-09 -0.1 -0.15 7-Apr-09 17-Apr-09 27-Apr-09 7-May-09 17-May-09 27-May-09 6-Jun-09 16-Jun-09 26-Jun-09 6-Jul-09 16-Jul-09
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
3
EMH Aim & Meth ICICI Fortis RIL Conclusion
?
?
Reliance Industries Ltd. (RIL) on 11 June, 2010 entered into an agreement to acquire a substantial stake in Infotel Broadband Services (P) Ltd investing about Rs. 4,800 crore Small gradual increase in CAR prior to the announcement date
? Implication: Low information ‘leakage’ prior to announcement ? Ideal case: jump/down in CAR only on announcement date
• Significant decrease in CAR after announcement
?
• This decrease in abnormal returns was not short lived
? Implication: Investors view the acquisition as unfavourable for the company
Implications: This is not in accordance with efficient market hypothesis that once new information comes to the market, investors react quickly. In this case it took time to stabilize
• As is typical, there was a spurt in volumes on the date of announcement indicating increased activity in the stock
EMH Aim & Meth ICICI Fortis RIL Conclusion
35 30 25 20 15 10 5 0 12/04/2010 22/04/2010 02/05/2010 12/05/2010 22/05/2010 01/06/2010 11/06/2010 21/06/2010 01/07/2010 11/07/2010 21/07/2010 -5 -10 25000000 20000000 15000000 10000000 5000000 0 Series1 Series1
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
?
Insider trading exists to a certain extent only Strong form of efficiency may thus be questioned
?
?
Uses of Event studies
? To measure the economic impact of wide range of events ? Insider trading detection ? Fraud cases detection
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
doc_468522695.pptx
Indian firms which tests the efficient market hypothesis to see if it is actually possible to achieve a positive, significant and abnormal return, with the announcement of a company takeover.
1. 2. 3. 4. 5. 6.
EMH Versions Aim of the study Case - ICICI Case - Fortis Case - RIL Conclusion
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
They differ in what is meant by “all available information”
?
Weak form
? It is impossible for an investor to achieve a positive abnormal return by using past information on stock prices
?
Semi strong form
? Market that fully reflects all public information, making an investor unable to outperform the Market
?
Strong form
? It is expected that any type of information – private or public - that may be relevant to the value of a stock, even if it is only known by one investor, will already be adjusted for in the Market.
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
?
Efficient Market Hypothesis states that investors should not be able to earn above normal returns in the Market, due to the fact that the Market operates with all pertinent information taken into account. Event study tests this particular hypothesis to see if it is actually possible to achieve a positive, significant and abnormal return, with the announcement of a company takeover The different forms efficient market hypotheses which test an investor’s ability to earn a positive abnormal return on the basis of takeover announcements are examined here
?
?
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
1.
2.
All of the information about the stock price and market price within the duration of -181 days to +30 days is attained. The time period from Day -30 to Day 30 is referred to as the event period. The holding period return for the firms (R) and the market (Rm) will be calculated by using the following formula:
R = (Current day close price - Previous day close price) /Previous day close price
Rm
=(Current day market close price - Previous day market close price) /Previous day market close price
3.
A regression analysis was performed comparing the actual daily return of each company to the Market daily return
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
4. Find the intercept alpha and the standardized coefficient beta 5. The Excess/Abnormal Return (ER) was calculated using: ER = the Actual Return (R) – Expected Return E(R)
Statistical importance To isolate the impact of the event on the share price
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
“Taming the Camel”
1
EMH Aim & Meth ICICI Fortis RIL Conclusion
? ?
On 18 May 2010, ICICI announced takeover of Bank of Rajasthan Small gradual increase in CAR prior to the announcement date
? Implication: Low information ‘leakage’ prior to announcement ? Ideal case: jump in CAR only on announcement date
• Significant rise in CAR after announcement
• This increase in abnormal returns was short lived & CAR stabilized soon
? ? Implications: This is in accordance with efficient market hypothesis that once new information comes to the market, investors react quickly With prices once again fairly set, further abnormal returns are equally likely to be positive or negative
? Implication: Investors view the acquisition as favourable for the company
• As is typical, there was a spurt in volumes on the date of announcement indicating increased activity in the stock
EMH Aim & Meth ICICI Fortis RIL Conclusion
CAR
1 0.8 0.6 0.4 0.2 0 3/13/2010 3/23/2010 -0.2 4/2/2010 4/12/2010 4/22/2010 5/2/2010 5/12/2010 5/22/2010 6/1/2010 6/11/2010 6/21/2010 7/1/2010 CAR
Volume
16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
2
EMH Aim & Meth ICICI Fortis RIL Conclusion
?
?
The news of Fortis acquiring Wockhardt was released on June 6, 2009. Great increase in CAR prior to the announcement date
? Implication: Information ‘leakage’ prior to announcement ? Ideal case: jump in CAR only on announcement date
? 1. 2. 3.
This could be because of following reasons: Insider trading norms not perfectly obeyed/enforced Before actual takeover, public becomes suspicious that such an event may occur Any news of a takeover does not happen all of a sudden on one day. It is spread over a period of time. Therefore there are spikes in the stock price movement indicating market reaction as and when new information comes
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
Cumulative abnormal return for Wockhardt
0.4 0.35 0.3 0.25
0.2 0.15 0.1 0.05
0 -0.05 28-Mar-09 -0.1 -0.15 7-Apr-09 17-Apr-09 27-Apr-09 7-May-09 17-May-09 27-May-09 6-Jun-09 16-Jun-09 26-Jun-09 6-Jul-09 16-Jul-09
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
3
EMH Aim & Meth ICICI Fortis RIL Conclusion
?
?
Reliance Industries Ltd. (RIL) on 11 June, 2010 entered into an agreement to acquire a substantial stake in Infotel Broadband Services (P) Ltd investing about Rs. 4,800 crore Small gradual increase in CAR prior to the announcement date
? Implication: Low information ‘leakage’ prior to announcement ? Ideal case: jump/down in CAR only on announcement date
• Significant decrease in CAR after announcement
?
• This decrease in abnormal returns was not short lived
? Implication: Investors view the acquisition as unfavourable for the company
Implications: This is not in accordance with efficient market hypothesis that once new information comes to the market, investors react quickly. In this case it took time to stabilize
• As is typical, there was a spurt in volumes on the date of announcement indicating increased activity in the stock
EMH Aim & Meth ICICI Fortis RIL Conclusion
35 30 25 20 15 10 5 0 12/04/2010 22/04/2010 02/05/2010 12/05/2010 22/05/2010 01/06/2010 11/06/2010 21/06/2010 01/07/2010 11/07/2010 21/07/2010 -5 -10 25000000 20000000 15000000 10000000 5000000 0 Series1 Series1
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
?
Insider trading exists to a certain extent only Strong form of efficiency may thus be questioned
?
?
Uses of Event studies
? To measure the economic impact of wide range of events ? Insider trading detection ? Fraud cases detection
EMH
Aim & Meth
ICICI
Fortis
RIL
Conclusion
doc_468522695.pptx