Impact of Government Budget Announcement on Stock Market Sector Indices: Evidence from Colombo Stock Exchange

Udani Chathurika Edirisinghe

doi:10.11648/j.jfa.20170506.12

Abstract

This study attempts to investigate the impact of Sri Lankan government budget announcements on five sector indexes of Colombo Stock Exchange, namely banks, finance & insurance; beverage, food & tobacco; manufacturing; motor; diversified holdings. The Event study methodology was used to analyze sector wise stock price behavior during the sample period of 2002 to 2013. Results revealed that although the overall trend of the average returns of each sector around budget announcements are same the magnitude of the reaction is different from sector to sector. Motor was the mostaffected sector and diversified holdings sector was the least affected.

Highlights

Government budget announcement would be a most awaited event by many parties/people in a country because it defines the financial road map of the country for the preceding year
Most importantly the policy decisions announced through the budget speech can be stimulating or discouraging to companies listed on the Colombo Stock Exchange (CSE)
The sector with the highest Cumulative Average Abnormal Returns (CAAR) is MTR (-8.14 percent) and the sector with the lowest CAAR is Diversified Holdings (DIV) and the CAAR of that sector is just.05 percent which is almost equal to zero but unlikely as other sectors the statistical significance of this sector is low which does not confirm the validity of the findings at the population level

Summary

Introduction

Government budget announcement would be a most awaited event by many parties/people in a country because it defines the financial road map of the country for the preceding year. The governing body of the country, to meet its objectives of reaching economic stability and growth execute numerous policies. These policy implementations involve humongous fund utilization in different sectors such as defense, administration, and development, and welfare. Date of the budget speech is one of the most awaiting political events in the country, as it will illustrate the government income and expenditure for proceeding year. Most importantly the policy decisions announced through the budget speech can be stimulating or discouraging to companies listed on the Colombo Stock Exchange (CSE). The objective of this study is to analyze the stock price reaction to budget announcements of five selected sector indices of Colombo Stock Exchange by utilizing event study methodologies. Current study would contribute to filling this gap in the literature

Objectives

Results

Conclusion