Abstract:
This paper examines the impact of the COVID-19 pandemic, the resulting investor
sentiment in determining stock returns of different sector portfolios; healthcare,
telecommunication, banking, insurance, and hotel companies in the Colombo Stock
Exchange (CSE), Sri Lanka, in the year 2020. Firstly, the event study methodology
focuses on the impact on sector portfolio returns after the World Health Organisation
declared COVID-19 as a global pandemic on 11th March 2020. Then, a second-stage
regression-based methodology is adopted to evaluate the impact of pandemic related news to identify the influence of investor sentiment on sector portfolio
returns and its persisting effects. Statistically, significant positive Cumulative
Average Abnormal Returns (CARs) are observed surrounding the event day. The
most striking phenomenon is positive and persisting CARs perceived after an
extended Island-wide lockdown curfew is lifted on 11th May 2020. CSE investors are
likely to be more sensitive to local events than to global news, and persisting CARs
indicate market inefficiency. Results of a second-stage regression-based analysis
reveal an initial negative sentiment effect on portfolio stock returns, followed by a
positive sentiment thereafter. The initial negative effect is relatively robust on banks
and hotel sector stock returns. A positive sentiment might emanate from
overreaction to the subsequent rebound with the removal of lockdown curfew and
the Government’s COVID-relief moratorium packages offered to businesses. CSE
investors are likely to react based on psychological bias or sentiment.
