The effect of stock splits and large stock Dividend on liquidity: evidence from the Nairobi stock exchange

Abstract

Since 1969, researchers have been bewildered with stock split, the pioneer study of Fama, Fisher, Jensen, and Ross, which tried to explain the reasons behind the noticeable increase in share prices before and after the announcement of the split. The study intended to find out whether or not stock splits have any effect on the liquidity of stocks. Specifically what motivates managers to engage in stock splits and to see if there was a change in liquidity before and after the splits. This was a descriptive research design study, aimed at establishing the effect of stock splits and stock distribution on the liquidity of a share. The sample was drawn from a population of 48 companies listed at the Nairobi Stock exchange. The individual companies were sampled through cluster sampling technique due to qualities each company in the sample had, they had either had a stock split or declared a bonus issue of25% and above. Data from secondary sources was used to compute the measure of Liquidity, which was proxy, by Trading Activity ratio. The data collected from the Nairobi Stock exchange, was edited, coded, transformed and entered into various data analysis tools ready for analyses by use of excel and SPSS computer packages. Data was analyzed and presented in form of frequency tables, and charts. The study found out that in the case of splits, most managers in Kenya opt for stock splits to 40 maintain an optimal trading range. The two split at the Nairobi Stock Exchange, namely; East African Breweries Limited (EABL) and Kenya Oil C<nhpany (KENOL) had improved activity after the split compared to before the stock split. The Stock distributions (Bonus issues) had varied results; this can be attributed to the cases like; Kenya Finance bank, which in 1994 and 1995 declared a stock dividend and put was under receivership a few months after the 1995 stock dividend declaration. The Unga Group in 1998 distributed stock dividend at the rate of one for every five held and yet the company incurred huge losses that year (Mbugua, 2004). The Kenyan investors seem to associate bonus issues with bad news, leading to the decline in liquidity of stocks, in the case stock dividends.