Shareholders’ Responses at the Announcement of the Changes in Executive Directors and Simi-Strong Form Efficient Market Hypothesis: Evidence from Colombo Stock Exchange (CSE)

Abstract

This study analyzes the shareholders’ responses at the announcement of the changes in executive directors of the companies listed on the CSE thereby provides a test of the semi-strong form efficient market hypothesis of Sri Lankan Share Market by using event study mythology. The sample consists of 66 listed companies, which made 156 of public announcements of the changes in the executive director on the CSE from 2009-2013. The Mean Adjusted Model, the Market Adjusted Model, and the Market Model along with proxy of the CSE All Share Price Index (ASPI) were used in this study in generating abnormal returns surrounding subsequent each announcement. Specifically, the Market model was used by incorporating cluster volatility effect and information asymmetric effects to get a strong conclusion. Apart from that Time Series models such as AR, MA, ARMA, GARCH, TARCH and EGARCH in relation to the stylized facts of each company returns within the sample specially to minimize the use of bias of the CSE All Share Price Index as a proxy in generating abnormal returns. Overall results of shareholders’ responses to the changes in directors' announcements based on each model along with the proxy of CSE all-share price index show the negative reaction for information subsequent to the changes in directors' announcements in CSE. The abnormal returns appear on a prior to the actual announcement of the information, as well as after the actual announcement of the information. It confirms that the shareholders respond negatively before and after the actual announcement of the information. In addition, these results confirm that the Sri Lankan Share market is inconsistent with semi-strong form market efficient hypothesis. These findings will be important to all parties interested in the share market. Especially, it is more important to the investors, the managers of the companies and the stock exchange regulatory agencies in their decision-making process