“The effect of bonus share issues on stock prices of companies quoted at the Nairobi stock exchange”

Abstract

In the recent past companies quoted on the Nairobi Stock Exchange have been using stock dividend as a mode of paying dividends. This emerging trend may be attributed to the pecking order theory, economic growth in the country and the appealing phenomenon amongst the investors.

This study focuses on the effect of bonus share issues on stock prices of companies quoted at the Nairobi Stock Exchange. The objectives of this study were to determine whether there are abnormal returns surrounding the bonus issues announcement and to establish the direction and magnitude of the stock price adjustment on announcement of bonus issue.

The sample consisted of all the companies quoted at NSE which declared bonus issues between the period of interest, I January 2004 to 31 July 2007, and were drawn from all the segments of the Nairobi stock exchange.

In order to achieve this objectives secondary data obtained from the NSE Secretariat informational database and the companies’ financial statements were used. Further, this study entailed the determination of the precise day of the bonus share issue announcement and this day was made to be day zero; definition of the period to be studied; in this study the study period was 101 days surrounding the announcement date.

The magnitude of bonus issue announcement was expected to vary across the firms because the announcements were made by companies in different industries and at different times. It was hence useful to examine the behavior of each company independently.Data was presented using tables and graphs. Descriptive statistics i.e. mean and standard deviation and t-tests were used to analyze data.

The findings of this study were such that bonus issues typically generate positive stock prices reactions in the short run but produce no lasting gains in the market price for widely held stocks in the Nairobi Stock Exchange. The limitations encountered included heavy reliance on secondary data, reliance on research studies conducted in the developed countries for literature review and due to unavailability of data this study was restricted to companies quoted in the Nairobi Stock Exchange.