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Rahul NagpureAnalyst, CRISIL Research

Tarun Bhatia

Director, Capital Markets

September 2011

ndependent equity esearch brings shift innvestor behaviour

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Disclaimer 

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report.Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL doesnot guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially statesthat it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of thisReport. CRISIL Research operates independently of, and does not have access to information obtained by 

CRISIL's Ratings Division, which may, in its regular operations, obtain information of a confidentialnature which is not available to CRISIL Research. No part of this Report may be published / reproducedin any form without CRISIL's prior written approval.

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Impact of CRISIL reports on traded volumes

To gauge the effect of CRISIL equity reports on liquidity and investor awareness of the researched company, we studied

the trend in a company’s traded volume before and after the release of CRISIL equity research report. The study sought

to assess the response of the market to the concept of independent equity research. We analysed the impact on traded

volumes for just one month after the release of the report as we believe that within this period new information is

absorbed in the market; beyond this period, however, other externalities get factored in.

M  

The following methodology was adopted to measure the impact of CRISIL equity reports on traded volumes of 

researched companies:

a) The release day of a company report was defined as the 0th day for the company, and its daily traded volumes2

were tracked from one month (20 working days) before the release to a month (20 working days) after the release.

This was done for 100 companies on which CRISIL has equity research coverage.

b) The traded volume data for different companies was stacked side-to-side (with the 0th day for all companies

coinciding). The volumes were then added horizontally for each day to arrive at the total traded volumes for the

portfolio of companies on that day.

c) The daily average of the total traded volumes for the portfolio was calculated for one month before the release of 

the reports and compared with the same calculated for one month after the release of the reports. A similar 

comparison was made for the pre- and post-release volumes for the one-week (five working days), two-week (10

working days) and three-week (15 working days) periods.

Key findingsThe analysis reveals that companies under CRISIL’s equity research coverage logged an increase in traded volumes

post the release of their reports. The impact has been more prominent for small and mid cap companies. More than half 

of small and mid-cap companies under CRISIL equity research coverage recorded an increase in traded volumes.

31 small cap companies (54%) logged an increase in traded volumes for the one-month period post release of 

CRISIL equity research reports

19 mid-cap companies (53%) logged an increase in traded volumes for the one-month period post release of CRISIL

equity research reports

2Volume traded on the National Stock Exchange (NSE) for 84 companies and volume traded on the Bombay Stock Exchange (BSE) for 16

companies

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3

Charts in figure 2 show the average growth in traded volumes for CRISIL-researched companies (also categorised into

small and mid-caps) over one week, two weeks, three weeks and one month after the release.

Average daily traded volumes increased by 12% for the one-month period post release of CRISIL equity research

reports.

For small caps, average daily traded volumes increased by 43% for the one-month period post release of CRISIL

equity research reports.

For mid-caps, average daily traded volumes increased by 32% for the one-month period post release of CRISIL

equity research reports.

The sharpest impact was witnessed in small caps over a two-week period. The average daily traded volumes

increased by 66%.

2 G i t v  p r  o C e r   

Source: CRISIL Research, NSE, BSE

15%

66%

47%43%

0%

10%

20%

30%

40%

50%

60%

70%

1 week 2 weeks 3 weeks 1 month

(Change in

tradedvolumes)

(Time elapsed post release of report)

Small caps under CRISIL equitycoverage (57)

21% 20%

29%

32%

0%

5%

10%

15%

20%

25%

30%

35%

1 week 2 weeks 3 weeks 1 month

(Change in

traded

volumes)

(Time elapsed post release of report)

Mid caps under CRISIL equitycoverage (36)

7%

10%

8%

12%

0%

2%

4%

6%

8%

10%

12%

14%

1 week 2 weeks 3 weeks 1 month

(Change intraded

volumes)

(Time elapsed post release of report)

All companies under CRISIL

equity coverage (100)

0

10

20

30

40

50

-1 month -2 weeks Release +2 weeks +1 month

Volumes

(mn)

Volumes (small caps) Average (small caps)Volumes (mid-caps) Average (mid-caps)Volumes (all) Average (all)

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 Average daily traded volumes across all categories of companies registered an increase post release of their CRISIL

reports. The significantly higher impact of these reports on the traded volumes of small and mid-cap companies

emphasises CRISIL’s value proposition of increasing their liquidity and transparency along with catering to investors’

underlying need for information about these companies.

Reduced transaction costs Apart from positively impacting traded volumes, increase in liquidity also reduces the transaction costs (measured by the

average bid-ask3 spread to price ratio) associated with the stock. This lowers the entry barrier, consequently attracting

more investors and, thus, creating a self-perpetuating cycle driving liquidity. This effect is confirmed by the reduction in

average transaction costs observed for the researched companies post-release of their CRISIL reports.

3 A  b s r   

Source: Industry, CRISIL Research

Conclusion

The positive response of investors to CRISIL’s independent equity reports underscores the value found in these reports,

especially by investors in small and mid-cap companies. It also highlights the strength of CRISIL’s emphasis on

independent evaluation of companies’ fundamentals. The study accentuates CRISIL’s efforts towards transforming equity

investing in India into a more fundamentals-driven and information-supported activity than it has been so far. As capital

requirements of companies increase with overall growth of the economy, the importance of independent equity research

will only amplify as companies increasingly tap into the equity market.

3The bid price is the price that a buyer is willing to pay for a security. The ask price is the price that a seller is willing to accept for the security.

The bid-ask spread is the difference between the bid and the ask price.

1.1%

0.9%

1.0%

0.7%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Small caps Mid caps

Before CRISIL Equity Report After CRISIL Equity Report