The Impact of Rights Issues on Security Prices - Nairobi Stock Exchange (Nse)

Abstract

This research project examines the impact of rights issue for companies listed in the Nairobi stock Exchange (NSE). Research on the impact of rights issue across the world has revealed conflicting results. The exact impact for the companies listed in the NSE is however unclear. 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. A sample of six companies from the Nairobi Stock exchange (NSE) for the period of 1st April 1996 to 31st December 2002 is selected and the market model is used to generate the excess returns. The constant parameters of the market model are computed from pre event data using the GARCH (Generalized AutoRegressive Conditional Heteroscedasticity) model, a superior analytical technique that incorporates data breaks. A competing method of Least Squares is also used to compare findings. 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 across the sample 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.