Does credit default & other managerial implications affect stock market and related industry?

Abstract

The series of debt default has started appearing in Indian markets recently such as DHFL debt crisis, Reliance Capital’s default, IL&FS debt crunch etc. The purpose of this paper is to observe the impact of debt default and other corporate announcements on the stock market as well as on the industry, i.e. recently happened event of Infrastructure Leasing& Financial Services (IL&FS) which defaulted in repaying the debt. The Corporate also faced other major changes in the management. The study is conducted on IL&FS three subsidiaries known as IL&FS Transportation Networks Limited, IL&FS Investment Managers Limited & IL&FS Engineering & Construction Company Limited. In this research paper, event study analysis is conducted in which abnormal and cumulative abnormal returns are calculated, t-test is applied by using single factor model and two way factor model to know and understand the significance of the event. In this study, test is applied on the historical prices of three subsidiaries of IL&FS which is listed on BSE.The research is showing a significant effect of the announcements regarding default in payment of debt and other events on stock prices, but the company’s stock performance not affecting the market and industry significantly which was observed through two way factor model. This study shows the impact of company announcement on the stock market and have not considered any other impact during that period therefore, confounding may exist.

Subject Classification:

• Primary 91B84
• Secondary 62P25

Keywords:

• Event Study
• Abnormal Return
• Cumulative Abnormal Return
• Debt Default