Empirical Study on Semi-Strong Form Market Efficiency: Evidence from Colombo Stock Exchange

Abstract

CHAPTER ONE-INTRODUCTION 1 1.1. Background of the Study 1 .1.1. Controversial results of the previous empirical studies on Efficient Market Hypothesis 1.1.2. Research Gap! 1.1.3. The controversy in the bonus share issues by Sri Lankan companies 1.1.4. Research Gap II 1.1.5. Methodological bias on test of market efficiency 1.1.6. Research Gap III 1.2. Research Problem 1.3. Objectives of the Study 1.4. About the Sri Lankan Stock Market 1.5. Research Methodology 1.5.1. Data 1.5.2. Research Methodology 1.6. Significance of the Study 11 1.7. Limitations of the Study 12 1.8. Organization of Chapters of the Report 14 1.9. Chapter Summary 14 CHAPTER TWO-REVIEW OF LITERATURE 16 2.1. Theoretical Concepts of Efficient Market Hypothesis 16 2.2. Concept of Informational Efficiency of Capital Markets 17 2.2.1. Definitions for Informational Efficiency 18 2.2.2. Characteristics and conditions of an informationally 20 efficient capital market 2.2.3. Different aspects of informational efficiency 22 2.3. Empirical Evidence on the Informational Efficiency of Capital 24 Markets 2.3.1. Tests of Weak form of Market Efficiency 25 2.3.2. Tests of Semi-strong form of Market Efficiency 28 2.3.2.1. Semi-strong form market efficiency in 28 developed capital markets 2.3.2.2. Semi-strong form market efficiency in 31 emerging capital markets 2.3.2.3. Research Gap I 2.3.3. Tests of Strong form of Market Efficiency 2.3.4. Challenges to Efficient Market Hypothesis 2.3.4.1. Positive/ negative serial correlation in returns 2.3.4.2. Violation of variance bounds 2.3.4.3. Noise trading 2.3.4.4. Market anomalies 2.4. Information Content of Bonus Issue Announcements 2.4.1. Theoretical aspects of bonus share issues 2.4.2. Motives for bonus share issues 2.4.3. Empirical evidence on the nature of the information conveyed by the bonus share issues 2.4.4. Bonus share issues in the Sri Lankan context 49 2.4.4.1. Legal Background 49 2.4.4.2. Current status of bonus share issues 51 2.4.4.3. Research Gap II 52 2.5. Event Study Methodology 53 2.5.1. Defining the event, event window and investigation 54 window 2.5.2. Selection of expected return estimation models 58 2.5.2.1. The Capital Asset Pricing Model (CAPM) 60 Lii 2.5.2.2. The Three-factor Model of Fama and French (1993) 2.5.2.3. The Mean-Adjusted Returns Model 2.5.2.4. The Market-Adjusted Return Model 2.5.2.5. The Market Model 2.5.2.6. Research Gap III 2.5.3. Data and Measurement of Return 2.5.3.1. Statistical issues of daily data and appropriate procedures to minimize the issues 2.5.3.2. Measurement of return 71 2.5,4. Descriptive analysis of daily return 2.6. Chapter Summary CHAPTER THREE-DATA AND METHODOLOGY 75 3.1. Data 75 3.2. Population and Sample of the Study 75 3.3. Measurement of Daily Return 3.4. Event Study Methodology 3.4.1. The event, event window, investigation window and 80 estimation window 3.4.2. Selection of expected return estimation models 81 3.4.3. Estimation of expected return 82 3.4.4. Measurement of abnormal returns 87 3.4.4.1. Average Abnormal Returns (AARs) 87 3.4.4.2. Cumulative Av...