Stock Market Reaction to Political Events: A Study of Listed Companies in Colombo Stock Exchange of Sri Lanka

摘要

This study examines market efficiency and market reaction to political events in Colombo Stock Exchange (CSE) using a sample of 40 major political events of the emerging market of CSE which represents different industry sectors from 2008 to 2012. Standard event study methodology is employed to find the results. The results reveal biggest impressive negative AARs of -2.27 percent and strong negative significant (t=-3.27) at 1% level which produced on the political event date. This result shows that political events indicate significant negative information to the CSE. On average, market reacts negatively to market related informational event. Further, largest negative cumulative average abnormal returns (CAARs) of -1.71 percent is found during the 21 days window period. In this negative CAARs, investors’ overall believe that this event result in incremental negative future cash flows of the stock exchange of Sri Lanka. In addition to these findings, this speed market response support to the efficient dissemination of information to stock market participants since stock price adjusts very quickly to political risk information. Furthermore, stock market participants cannot earn abnormal returns by trading in the stock after the event day. Despite, the event day is unprofitable, the market is informational efficient under the market related informational event. Keywords: Abnormal Returns, Event Study, Market Efficiency, Political Event, and Window Period