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Efficient Market Hypotheses Testing - With Reference to Dividend, Bonus Share and Split Share



Abstract

EMH is one of the well-known methods for measuring the future value of stock prices. According to this hypothesis, the market is efficient if its prices are formed on the basis of all disposable information. One stock market is efficient only if all relevant information about company is incorporated in stock price of this company. Business cycle theoreticians assumed that multiple regression model can be used for forecasting business cycle movement. Scientist, Maurice Kendall had tested a computer model for predicting shares prices in 1953. Results were not satisfactory. Random movement of share process, their unpredictability goes in favour of EMH as this example shows that only new information can affect share price. According to EMH if there is a possibility to predict the future price of shares, that is the first sign of an inefficient market. Key Words: EMH, Split Shares, Bonus Shares, Dividend

Literature Review:

American economist, Eugene Fama, proposed three types of efficiency:

  • Weak form;
  • Semi-strong form;
  • Strong efficiency.

Weak form efficiency claims that all past prices of a stock are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market.

Semi-strong efficiency implies that all public information is calculated into a stock's current share price. It means that neither fundamental nor technical analysis can be used to achieve superior gains.

Strong form efficiency is the strongest version of market efficiency. It states all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor the advantage.

Random walk theory claims that stock market can be analyzed as random walk according to next three facts:

  • Efficient markets respond very fast to new information;
  • If the share price is a reflection of all available information, it is impossible to use that information for market predictions;
  • It is impossible to predict market movement other than randomly.

There are a large number of direct and indirect tests as evidence for or against the EMH. Scientist Simon Keane in his work from 1983. Provides some basic explanations of what makes markets inefficient. His very popular idea is called “Gambler’s Fallacy”. This can be explained as the belief that what “goes up must come down”. This phenomenon exhibits itself amongst investors whose stocks price has risen for a period of time and so is deemed to be “due for a fall”. Generally speaking, by knowing the relationship of the current price to recent price movements, one can better estimate the likely direction of future price movements, i.e. historical data such as price movement can be used to predict future prices. This provides credibility to the argument that the market is predictable and inefficient. Therefore, the issue is to see whether the stock market is predictable or not by detecting serial dependence of stock returns.

Two very popular tests of market efficiency will be presented in this paper - Augmented Dickey-Fuller (ADF) test, Run test and Autocorrelation Function (ACF) test. Research will test if some well-known anomalies on the capital market of Montenegro do exist in order to show if critics of EMH are justifiable. Some of the main anomalies that have been identified are as follows: "January effect", "Monday effect", "Holiday effect" and "Turn-of-the-month effect".

RESEARCH METHODOLOGY

Research Objective
  • To evaluate efficient market hypotheses by the three vital parameters of the market. i.e. Dividend policy, bonus shares and split of share.
  • To study the impact of dividend policy, bonus share issue and split of share over the stock prices of different firms from different sectors.
  • To give findings and suggestions for this study.

Research Design & Methodology

Secondary data have been taken from company’s websites. Data have been analysed by the help of t-test. Three different firms have been taken from different sectors for the study. The time period for the study is of one week.

Analysis and Interpretation of Canara Bank

STOCK PRICES OF CANARA BANK:

Date

Open Price

High Price

Low Price

Close Price

10-May-12

405

423.1

390.2

418.8

09-May-12

422.5

422.5

403.35

406.75

08-May-12

437

437.85

421.6

425.05

07-May-12

426

434.8

418.2

432.85

04-May-12

429

433

421

426

03-May-12

435

435

427.2

429.4

02-May-12

440

442.45

431.55

435.35



The above table shows the Open, High, Low and Close Stock Price of the Canara Bank from 2nd May, 2012 to 10th May, 2012. These stock prices are of 7 days as the stock market deals from Monday to Friday 9:00 a.m. to 5:00 p.m. These prices are before declaration of dividend.

DECLARATION OF DIVIDEND:


Announcement Date

Effective Date

Dividend Type

Dividend (%)

Remarks

10/05/2012

14/06/2012

Final

110

-



On 10th May, 2012 Canara Bank has declared the dividend of 110%. It has come into effect from 14th June, 2012.

STOCK PRICES AFTER DECLARATION OF DIVIDEND:


Date

Open Price

High Price

Low Price

Close Price

21-May-12

399.8

403.5

391

392.55

18-May-12

398.05

400

390

397.9

17-May-12

400.5

403.75

395.3

398.05

16-May-12

398.95

402.8

391.65

394.6

15-May-12

405.95

411.15

401.1

404.5

14-May-12

420.9

424

403.05

408.95

11-May-12

417

427.05

412.8

419



The above table shows the Open, High, low and Close Stock Prices of Canara Bank from 11th may, 2012 to 21st May, 2012, i.e. 7 days. These prices are after declaration of dividend.

t - TEST FOR OPEN PRICE:

BEFORE DECLARATION OF DIVIDEND

AFTER DECLARATION OF DIVIDEND

405

399.8

422.5

398.05

437

400.5

426

398.95

429

405.95

435

420.9

440

417

t-Test: Paired Two Sample for Means:


 

Variable 1

Variable 2

Mean

427.78571

405.87857

Variance

139.65476

87.41738

Observations

7.00000

7.00000

Pearson Correlation

0.58375

 

Hypothesized Mean Difference

0.00000

 

df

6.00000

 

t Stat

5.85271

 

P(T<=t) one-tail

0.00055

 

t Critical one-tail

1.94318

 

P(T<=t) two-tail

0.00110

 

t Critical two-tail

2.44691

 



The above table shows t-test of Open Stock Price of Canara Bank. Here, the calculated value of t-test is 0.00110 which is lower than table value which is 2.44691. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t - TEST FOR HIGH PRICE:

BEFORE DECLARATION OF DIVIDEND

AFTER DECLARATION OF DIVIDEND

423.1

403.5

422.5

400

437.85

403.75

434.8

402.8

433

411.15

435

424

442.45

427.05



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

432.67143

410.32143

Variance

54.59488

120.07571

Observations

7.00000

7.00000

Pearson Correlation

0.65035

 

Hypothesized Mean Difference

0.00000

 

df

6.00000

 

t Stat

7.10035

 

P(T<=t) one-tail

0.00020

 

t Critical one-tail

1.94318

 

P(T<=t) two-tail

0.00039

 

t Critical two-tail

2.44691

 



The above table shows t-test of High Stock Price of Canara Bank. Here, the calculated value of t-test is 0.00039 which is lower than table/critical value which is 2.44691. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t -TEST FOR LOW PRICE:

BEFORE DECLARATION OF DIVIDEND

AFTER DECLARATION OF DIVIDEND

390.2

391

403.35

390

421.6

395.3

418.2

391.65

421

401.1

427.2

403.05

431.55

412.8



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

416.15714

397.84286

Variance

208.98869

69.09869

Observations

7.00000

7.00000

Pearson Correlation

0.76986

 

Hypothesized Mean Difference

0.00000

 

df

6.00000

 

t Stat

5.02294

 

P(T<=t) one-tail

0.00120

 

t Critical one-tail

1.94318

 

P(T<=t) two-tail

0.00240

 

t Critical two-tail

2.44691

 



The above table shows t-test of Low Stock Price of Canara Bank. Here, the calculated value of t-test is 0.00240 which is lower than table/critical value which is 2.44691. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t- TEST FOR CLOSE PRICE:


BEFORE DECLARATION OF DIVIDEND

AFTER DECLARATION OF DIVIDEND

418.8

392.55

406.75

397.9

425.05

398.05

432.85

394.6

426

404.5

429.4

408.95

435.35

419



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

424.88571

402.22143

Variance

93.41976

86.61405

Observations

7.00000

7.00000

Pearson Correlation

0.52682

 

Hypothesized Mean Difference

0.00000

 

df

6.00000

 

t Stat

6.49426

 

P(T<=t) one-tail

0.00032

 

t Critical one-tail

1.94318

 

P(T<=t) two-tail

0.00063

 

t Critical two-tail

2.44691

 



The above table shows t-test of Close Stock Price of Canara Bank. Here, the calculated value of t-test is 0.00063 which is lower than table/critical value which is 2.44691. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

Analysis and Interpretation of RIL
STOCK PRICES OF RELIANCE INDUSTRIS LTD.

Date

Open Price

High Price

Low Price

Close Price

07-Oct-09

2100

2155

2083.1

2099

06-Oct-09

2139.7

2155

2102.9

2132.45

05-Oct-09

2069.7

2172

2069.7

2137.1

01-Oct-09

2189.7

2205

2155

2170.45

30-Sep-09

2170.15

2210.9

2161.1

2201.2

29-Sep-09

2150

2177

2141

2166

25-Sep-09

2084.95

2146

2075.85

2129.8



The above table shows the Open, High, Low and Close Stock Price of the Reliance Industries Ltd. from 25th September, 2009 to 7th October, 2009. These stock prices are of 7 days as the stock market deals from Monday to Friday 9:00 a.m. to 5:00 p.m. These prices are before declaration of bonus shares.

DECLARATION OF BONUS SHARE:

Announcement Date

Bonus Ratio

Record Date

Ex-Bonus Date

07/10/2009

1:01

27/11/2009

26/11/2009



On 7th October, 2009 Reliance Industries Ltd. has declared the bonus shares in the ratio of 1:1.

STOCK PRICES AFTER DECLARATION OF BONUS SHARE:

Date

Open Price

High Price

Low Price

Close Price

17-Oct-09

2304

2304

2212

2224.75

16-Oct-09

2185.05

2222

2150.15

2216.6

15-Oct-09

2199

2222

2165

2171.4

14-Oct-09

2180.05

2195

2153.1

2178.2

12-Oct-09

2115.05

2185.05

2112

2167.1

09-Oct-09

2118

2132.45

2090

2100.05

08-Oct-09

2150

2209

2100

2119.2



The above table shows the Open, High, low and Close Stock Prices of Reliance industries Ltd. from 8th October, 2009 to 17th October, 2009, i.e. 7 days. These prices are after declaration of bonus shares.

t- TEST FOR OPEN PRICE:

BEFORE DECLARATION OF BONUS SHARE

AFTER DECLARATION OF BONUS SHARE

2100

2304

2139.7

2185.05

2069.7

2199

2189.7

2180.05

2170.15

2115.05

2150

2118

2084.95

2150



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

2129.1714

2178.7357

Variance

2038.4982

4118.9698

Observations

7.0000

7.0000

Pearson Correlation

-0.4209

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

-1.4143

 

P(T<=t) one-tail

0.1035

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.2070

 

t Critical two-tail

2.4469

 



Above table shows t-test of the Open Stock Price of Reliance industries Ltd. Here, calculated value is 0.2070, which is lower than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t- TEST FOR HIGH PRICE:

BEFORE DECLARATION OF BONUS SHARE

AFTER DECLARATION OF BONUS SHARE

2155

2304

2155

2222

2172

2222

2205

2195

2210.9

2185.05

2177

2132.45

2146

2209



t-Test: Paired Two Sample for Means:

BEFORE DECLARATION OF BONUS SHARE

AFTER DECLARATION OF BONUS SHARE

2083.1

2212

2102.9

2150.15

2069.7

2165

2155

2153.1

2161.1

2112

2141

2090

2075.85

2100



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

2112.6643

2140.3214

Variance

1518.6423

1827.8182

Observations

7.0000

7.0000

Pearson Correlation

-0.4049

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

-1.0678

 

P(T<=t) one-tail

0.1633

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.3267

 

t Critical two-tail

2.4469

 



Above table shows t-test of the Low Stock Price of Reliance industries Ltd. Here, calculated value is 0.3267, which is lower than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t- TEST FOR CLOSE PRICE:

BEFORE DECLARATION OF BONUS SHARE

AFTER DECLARATION OF BONUS SHARE

2099

2224.75

2132.45

2216.6

2137.1

2171.4

2170.45

2178.2

2201.2

2167.1

2166

2100.05

2129.8

2119.2



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

2148.0000

2168.1857

 

Variance

1125.1825

2116.2223

 

Observations

7.0000

7.0000

 

Pearson Correlation

-0.4026

 

 

Hypothesized Mean Difference

0.0000

 

 

df

6.0000

 

 

t Stat

-0.7976

 

 

P(T<=t) one-tail

0.2278

 

 

t Critical one-tail

1.9432

 

 

P(T<=t) two-tail

0.4555

 

 

t Critical two-tail

2.4469

 

 



Above table shows t-test of the Close Stock Price of Reliance industries Ltd. Here, calculated value is 0.4555, which is lower than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

Analysis and Interpretation of Jindal Stainless

STOCK PRICES OF JINDAL STAINLESS:

Date

Open Price

High Price

Low Price

Close Price

23-Jan-04

465

485

458.25

483.8

22-Jan-04

450

477.4

427

449

21-Jan-04

490

499.85

445

448.25

20-Jan-04

516

523.5

476.5

488.55

19-Jan-04

511

513.75

489.9

508.25

16-Jan-04

525

526.5

496

504.15

15-Jan-04

569.85

569.85

526

530.2



The above table shows the Open, High, Low and Close Stock Price of the Jindal stainless. from 15th January, 2004 to 23rd January, 2004. These stock prices are of 7 days as the stock market deals from Monday to Friday 9:00 a.m. to 5:00 p.m. These prices are before declaration of split shares.

DECLARATION OF SPLIT SHARE:

Announcement Date

Old FV

New FV

Ex-Split Date

23/01/2004

10

2

01/03/2004



On 23rd January, 2004 Jindal Stainless has declared the split shares with the new face value of Rs. 2 for old face value with Rs. 10.

STOCK PRICES AFTER DECLARATION OF SPLIT SHARE:

Date

Open Price

High Price

Low Price

Close Price

05-Feb-04

425

433

405

412.35

04-Feb-04

415

428.5

405

424.7

03-Feb-04

434.1

445

398

405.7

30-Jan-04

465.05

466

426

434.1

29-Jan-04

473

477

453.05

465.55

28-Jan-04

489.95

494

467.4

472.2

27-Jan-04

500

550

486

489.05



The above table shows the Open, High, low and Close Stock Prices of Jindal Stainless from 27th January, 2004 to 5th February, 2004, i.e. 7 days. These prices are after declaration of split shares.

t -TEST FOR OPEN PRICE:

BEFORE DECLARATION OF SPLIT SHARE

AFTER DECLARATION OF SPLIT SHARE

465

425

450

415

490

434.1

516

465.05

511

473

525

489.95

569.85

500



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

503.8357

457.4429

Variance

1600.5056

1094.4237

Observations

7.0000

7.0000

Pearson Correlation

0.9532

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

9.3630

 

P(T<=t) one-tail

0.0000

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.0001

 

t Critical two-tail

2.4469

 



Above table shows t-test of the Open Stock Price of Jindal Stainless. Here, calculated value is 0.0001, which is lower than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t- TEST FOR HIGH PRICE:

BEFORE DECLARATION OF SPLIT SHARE

AFTER DECLARATION OF SPLIT SHARE

485

433

477.4

428.5

499.85

445

523.5

466

513.75

477

526.5

494

569.85

550



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

513.6929

470.5000

Variance

957.6512

1792.5833

Observations

7.0000

7.0000

Pearson Correlation

0.9763

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

8.2492

 

P(T<=t) one-tail

0.0001

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.0002

 

t Critical two-tail

2.4469

 



Above table shows t-test of the High Stock Price of Jindal Stainless. Here, calculated value is 0.0002, which is lower than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t- TEST FOR LOW PRICE:

BEFORE DECLARATION OF SPLIT SHARE

AFTER DECLARATION OF SPLIT SHARE

458.25

405

427

405

445

398

476.5

426

489.9

453.05

496

467.4

526

486



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

474.0929

434.3500

Variance

1124.1770

1203.9342

Observations

7.0000

7.0000

Pearson Correlation

0.9434

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

9.1163

 

P(T<=t) one-tail

0.0000

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.0001

 

t Critical two-tail

2.4469

 



Above table shows t-test of the Low Stock Price of Jindal Stainless. Here, calculated value is 0.0001, which is higher than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

t - TEST FOR CLOSE PRICE:

BEFORE DECLARATION OF SPLIT SHARE

AFTER DECLARATION OF SPLIT SHARE

483.8

412.35

449

424.7

448.25

405.7

488.55

434.1

508.25

465.55

504.15

472.2

530.2

489.05



t-Test: Paired Two Sample for Means:

 

Variable 1

Variable 2

Mean

487.4571

443.3786

Variance

928.1112

1037.5924

Observations

7.0000

7.0000

Pearson Correlation

0.8820

 

Hypothesized Mean Difference

0.0000

 

df

6.0000

 

t Stat

7.6133

 

P(T<=t) one-tail

0.0001

 

t Critical one-tail

1.9432

 

P(T<=t) two-tail

0.0003

 

t Critical two-tail

2.4469

 



Above table shows t-test of the Low Stock Price of Jindal Stainless. Here, calculated value is 0.0003, which is higher than table value, which is 2.4469. Hence the null hypothesis is accepted and Alternative hypothesis is rejected. So the difference is insignificant.

Limitations

  • The data which have been taken for research is a secondary data.
  • There are only three companies from different sectors have been taken for the study.
  • Time period for study is of one week.
Findings

1. CANARA BANK:

  • We can see from t-test that the Open, high, Low and Close stock price of Canara bank decreases after declaration of dividend.
  • It means that if the rate of dividend is not in favour of share holders, the demand of stock of respective firms decreases and therefore the firm has to reduce its stock price.
  • Thus, here the difference is insignificant, H0 is accepted.


2. RELIANCE INDUSTRIES Ltd.

  • The open price of RIL increases for first three days of a week after declaration of bonus shares and minor decrease is found in last four days of a week.
  • The high price of RIL increases for first three days of a week after declaration of bonus shares, minor decrease is found in next three days and again it increases at the last day of week.
  • The low price of RIL increases after declaration of bonus shares accept 5th and 6th day of a week.
  • There is an increase in stock price for first four days of a week in RIL and then the prices are decrease in last three days of a week.
Overall there is an increase is found in the stock prices after declaration of bonus shares. Thus the difference is insignificant, H0 is accepted.

3. JINDAL STAINLESS:

  • We can see from t-test that the Open, high, Low and Close stock price of JINDAL Stainless are continuously decrease after Splitting of shares.
  • Thus, here the difference is insignificant, H0 is accepted.

Suggestions and Recommendations:

  • Dividend rate should be in favour of the share holders so that even the minor decrease cannot be found in stock price.
  • The time period of payment of dividend must be considered as a vital point.
  • The dividend policy also plays an important role in the fluctuation in stock prices.
  • The ratio of payment of bonus share is one of the key players in determining the stock price. So that RIL should consider this ratio.
  • Jindal stainless should split their shares into such a way that the new face value of shares and the number of shares can maintain the balance of old face value of shares.

Conclusion

  • IT and Banking sector, last year’s dividend and PAT have a significant effect on the current year’s dividend.
  • There is a great impact of dividend policy, declaration of bonus shares and split of shares on the stock prices of the companies.
  • Therefore a company should decide their best Efficient Market Hypotheses.
  • Finally to make more efficient it is expected that the authority of the market would introduce sophisticated means of investment and tools in the near future and above all the campaigns to sensitize people about the importance of the stock market and how to invest in the stock market and what are the benefits.

REFERENCES :

  1. http://www.tulane.edu/~gatchev/Liquidity_and_Dividends.pdf
  2. http://ebookbrowse.com/bonus-share-issue-pdf-d330078706
  3. http://www.investopedia.com/ask/answers/113.asp
  4. http://www.powershow.com/view/1dec4e-N2ZlM/Dividend_Policy_powerpoint_ppt_presentation
  5. http://www.moneycontrol.com/company-facts/canarabank/dividends/CB06#CB06
  6. http://www.moneycontrol.com/company-facts/relianceindustries/bonus/RI#RI
  7. http://www.moneycontrol.com/company-facts/jindalstainless/splits/JSL01#JSL01
  8. http://www.bseindia.com/stock-share-price/canara-bank/canarabank/532483/
  9. http://www.bseindia.com/stock-share-price/reliance-industries-ltd/ril/500325/
  10. http://www.bseindia.com/stock-share-price/jindal-stainless-ltd/jsl/532508/

*************************************************** 

Ms. Ankita H. Vaidya
M.Com Student,
N.C. Gandhi Mahila Arts and Smt B.V. Gandhi Commerce College,
S.N.D.T. Women’s University,
Bhavnagar


Mr. Harsh K. Pandya
Research Student,
M.K. Bhavnagar University,
Bhavnagar

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