Upward Switches on BSE: An Explanation for Anomalous Stock Price Behaviour

Abstract

Stock exchanges in developed markets provide multiple equities platform for a sophisticated equity trading worldwide. The trading system on stock exchanges in developing countries, however, is typically two-tiered so as to segregate trading interest on a wider spectrum of investor�s interest. The stock exchange authorities with such trading structures monitor the financial health of their listed companies and take a switch decision by moving a company from a low- or high-class segment to a high-or low-class segment based on certain factors. This paper attempts to discern the general pattern of market behaviour of 38 common stocks around up-switches from Group ‘B’ to Group ‘A’ on the Bombay Stock Exchange during 2008–2010. In addition, an attempt was made to examine the effect of preswitching trading volume on the pattern of returns around up-switching. Standard event methodology using the market-adjusted model was used to examine the market behaviour around the two event dates, i.e., announcement and actual switching. The same estimation period of -210 to -51 days was used for both event dates. Three tests, namely, a sign test, a matched-pairs t-test, and a Wilcoxon matched-pairs signed-ranks test were used to examine differences in volume and risk before and after switching. Finally, other contemporaneous announcements which might have had an effect on the results for low and high sub-sample companies were also checked. The results confirm that subtle differences exist in market behaviour around up-switches. The market responds weakly but positively to the announcement of an up-switch. However, in the days around the actual up-switch, the companies earn negative abnormal returns though not significant. Further, over the total test period, the cumulative abnormal results of the low volume group are significantly lower than those of the high volume group at the five per cent level over days -10 to +10. Thus, the results show that around the up-switch, the market response is more favourable to stocks with high volume than their low volume counterparts. A further examination of trading volume, beta, as well as other corporate announcements helped in discerning the underlying cumulative abnormal return patterns. The present paper distinguishes itself from the previous studies on the subject as it goes beyond documenting the abnormal returns around up-switches by presenting probable explanations for their existence. It provides researchers and others valuable understanding regarding the market segment change anomalies and the role of other pre-switching attributes in explaining market behaviour around switching.