Devaluation and convertibility announcements: effect on BSE stock prices- an empirical study

Abstract

The work aimed to find out if Indian stock markets (B’ bay stock exchange) are efficient processors of macroeconomic information by taking the devaluation (July 1991) and convertibility announcements for further study. The methodology used was the technique of event study. The methodology used was the technique of event study in finance. The method computes a return generating model for each scrip and applies it on the price data during the announcement periods to check for abnormal performance. The first step was a sectoral study of the economy to short list certain industries after which export import intensity at a company wise level was collected for 1991 and 1990. This yielded a sample of 60 companies for which the share price data was collected along with the market indices (sensex, natex) during the period June 1990 to May 1992. The companies were grouped into export intensive, import intensives or natural sets taking each one’s performance into account (sophisticated model). The other method was to classify entire sector into export or import intensive (naive model) The results for the sophisticated model show that during the devaluation announcements export intensive companies recorded a positive abnormal performance, import intensive companies negative abnormal performance and the natural set zero abnormality all significant at the 1% level. Efforts to correlate these with the export import intensively gave good results via regressions. The period of adjustment seems to be round 5 days for the event. For the convertibility period the results are not clear cut as one would have expected, probably due to the multitude of the announcements in the budget along with convertibility. The native model gives results similar to that of the sophisticated model and the abnormal performance are quite comparable. In both these models there were sudden peaks in the abnormal returns around days 12-16 after the devaluation announcements (they are statistically significant) which have been explained by events like the presentations of the railway budget and the draft on new industrial policy.