Corporate events have numerous effects on the stock market, as found by several research studies in the world. In this regard, the aim of this paper is to test the semi-strong form of efficiency in the Indian equity market, following an event study approach. The events considered in this paper are bonus issues and stock splits that took place in the market from 1996 to 2008. These events are tested for abnormal returns and liquidity. The data selected is free from the impact of confounding events. –30 to +30 days investigation window is taken for all the events to test the abnormal returns and the change in liquidity. The results suggest that the Indian market reacts to the stock split announcements but not to bonus issues, and the change in liquidity is significant for stock splits at 1% significance level, whereas with 5% level of significance both bonus issues and stock splits show significant change in liquidity from pre- to post-event period.

Efficient Market Hypothesis (EMH) signifies that all appropriate information is quickly and fully assimilated in a security's market price, thereby guessing that an investor will obtain an equilibrium rate of return. In other words, an investor in the market should not anticipate an abnormal return. However, random walk theorists generally start with the premise that the major security exchanges are good instances of efficient markets. A market where consecutive price changes in individual securities are independent is, by definition, called a random walk market (Fama, 1965). The random walk theory affirms that all information is replicated in the current stock prices. Thus, any new information would also take little time to be completely incorporated in the prices, and the market players, thus, would have little time to exploit this new information to realize above normal profits.

Fama (1970) recognized three forms of market efficiency explicitly: the weak, semi-strong and strong. Weak form of market efficiency says that current stock prices fully reflect all the past information. Any attempt to forecast prices based on historical prices or information is completely futile, as the prices follow random walk process. Semi-strong form expands the idea of efficiency a little further and describes that current stock prices replicate all the publicly available information. Prices adjust very quickly to such information, so the above normal returns cannot be earned on a consistent basis. The strong form is a situation where all the pertinent information, whether it is within the public domain or private domain, will be reflected in the stock market price.

By explaining the event studies, one can measure how quickly stock prices respond to different pieces of news, such as corporate earnings or dividend announcement, news of a merger and takeover, or macroeconomic news. The aim of this paper is to observe the stock price reaction to announcement of bonus issues and stock splits, and thereby examine if Indian stock market is efficient in its semi-strong form or not. Over the past half century, event studies have been employed in many research studies across the globe and their superiority has been greatly improved by Dolley (1933), Fama et al. (1969), Brown and Warner (1985) and Gupta (2008).

Applied Finance Journal, Corporate Events, Indian Equity Market, Efficient Market Hypothesis, Indian Stock Market, Securities and Exchange Board of India, Emerging Market, Corporate Announcements, Center for Monitoring Indian Economy, Market Regulators, Stock Split Announcements.