Reaction of Sao Paulo stock exchange corporative events: a test of the Efficient Market Hypothesis

Abstract

The Efficient Market Hypothesis, defined by Fama (1970 and 1991), in the moderate version, postulates an instantaneous and precise adjustment by the market for any relevant information announced by participating companies. An analysis was made of the reaction of Sao Paulo Stock Exchange to abnormal returns around the time of announcement of the three specific corporate events of fusions and acquisitions, issuance of American Depositary Receipts and adherence to the Different Levels of Corporate Governance, in order to identify if the market was efficient according to the moderate Hypothesis. An Event Study collected data, between 1992 e 2004 of company stocks on the Exchange, for analysis of preferred stocks at times around all three types of these event announcements and for common stock analysis only at times around last type of event. Announcements of all the three types of events were shown to provide information relevant to market stock pricing. Exchange market reactions were found however only for fusions and acquisitions and adherence to the Different Levels of Corporate Governance but not for American Depositary Receipt. Because this market reacted to only two of the three types of events cited in the Hypothesis, it was therefore considered not to be efficient according to the moderate version of the Efficient Market Hypothesis.