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Nature of Price Elasticity of Common Stocks: Are Group Affiliates More Substitutable in Emerging Markets?
, Mohammad Shameem Jawed, Vijay Kumar Gupta
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The new Minimum Public Shareholding regulation (2010) required listed firms to increase public float to 25% in three years, starting June 2010. We use this regulatory move as a natural exogenous supply-side shock to examine the nature of the price elasticity of stocks in India. Using the Event Study methodology, we provide direct evidence of a downward sloping demand curve. Further analysis suggests that the demand curve is steeper for Standalone firms compared to the Group-Affiliated firms. Additionally, with the help of a series of empirical analysis, we rule out any possibility of alternate price impact theories/hypothesis viz. information/signalling, temporary price pressure and liquidity, affecting our key findings. Equity offers size and level of offer subscription had no role to play in explaining the abnormal returns, while undervalued, large and group affiliated stocks reacted less to the shock. Overall, the study …

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