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The Reaction of Right Issues and Debenture Issues on Share Prices: Evidence from Sri Lanka


Right issues and debenture issues are the types of methods for raising capital to finance organizations. These events are fully affected to stock prices. This paper studies the effect on the share price of listed firms on the Colombo Stock Exchange (CSE) to the right issue announcements and debenture issue announcements. The study consists of 85 right issue announcements and 106 debenture issue announcements over the 2012-2019 periods (8 years). The study analyses the share price performance of companies in the period immediately prior and post their right issue announcements and debenture issue announcements by using daily data for 281 days. All share price index for 281 days were used to estimate the market return. The analytical tool is the event study methodology in which the market model is used to calculate the abnormal returns of the study by using the secondary data. The observational findings indicate that the average abnormal return and cumulative average abnormal return of right issue announcements are statistically significant at a confidence level of 95 at the announcement day "0". Cumulative average abnormal returns were reported positively until the day of -1 and then shifted negatively. The results are statically significant around the day of announcements. That means the right issue announcements are affecting the stock prices. For the debenture issue announcements, there are both negative and positive average abnormal returns in the event period. The debenture issue announcements have positive average abnormal returns at the announcement day "0," and the value is statistically not significant. All of the cumulative average abnormal returns in the event period are more than their critical value and statistically significant. That means the debenture issue announcements are affecting the stock prices in the Colombo stock exchange. And the cumulative average abnormal returns represent the negative slope in the pre-event period. Further, it is continuing in the post-event period.

Keywords: Colombo Stock Exchange, Debenture issue announcement, Right issue announcements, Market model, Stock prices