Abstract:
Rights issue has been one of the popular ways of financing businesses in Sri Lanka. Financial
literature has shown a considerable interest on the effects of this method of financing on
shore prices. Many empirical studies conducted in developed and emerging markets have
shown contradictory results. Some studies have found a negative effect while others have
concluded no price effect for rights issue announcements. This study examines the effects
of rights issue announcements on share prices traded on the Colombo Stock Exchange.
Abnormal returns were calculated from daily share returns by using the market model
benchmark; the most popular benchmark employed in the event studies. The findings showed
that the announcement of rights has a negative effect on share prices; share prices suffered
a drop throughout the test period. The results of this study also showed that Colombo Stock
Exchange does not confirm to the semi-strong version of market efficiency hypothesis. No significant
price adjustments were observed during the announcement period of rights issues.
