The effect of rights issue on market returns of firms listed at Nairobi securities exchange

Abstract

Rights issue is a form of financing that not only involves shareholders but also result to an increase in the number of equity of the firm at the securities’ exchange. With an increase in equity, there exist some market reactions especially to the issuing firm. Investors have the potential of affecting the firms trading at the security market. The market reactions can be positive where there is increased trading of the firm's shares or negative which is reduced trading volume. The share prices take the same trend. The objective of the research was to evaluate the effects of the rights issue on the stock returns of firms listed at the NSE .The firms examined, were those listed at the Nairobi Stock Exchange. These kinds of research are useful mainly to potential investors and corporate managers who may be faced with a rights issue paradox and rights issue financing option respectively. The market model was used to generate the excess returns. The significance of the findings is tested using the two tailed t statistic. The overall findings strongly confirm that rights issues in the NSE have information content. The nature of the information is negative but the extent is varied like other findings across the world. The implication of these findings is that companies issuing rights must release sufficient and relevant information to the market for proper interpretation of the issue