The characteristics of bonus-issuing firms in Kenya: an empirical study.

Abstract

Studies such as that conducted by Grinblatt et aI., (1984), have proven that Stock dividends are more than mere cosmetic changes. They appeal to investors because of their psychological value, tax benefits and because they signal prospects of higher profits in the future. This study, by refining the Lev and Lakonishok's (1987) study, empirically investigates the characteristics of the stock dividend firms quoted at the Nairobi Stock Exchange. It also documents a model for predicting the likelihood of a firm to issue stock dividends. The study applies Discriminant Analysis to construct the predictive model. The characteristics of the firms are derived from the group means. Classification of the firms into a group is based on the number of times a firm has made the distributions. Those that have never made the issue between 1991 to 1999 are classified in group 0, the ones that have issued once in group I, twice in group 2 and thrice in group 3. The model when expressed in a quadratic function correctly predicts 82% of the firms into their true groups. The results, based on an examination of fourteen financial statement derived variables, also indicate that the firms that have never made the distributions have higher dividend payout ratios, dividend yield, return on investments and a higher percentage • of capital reserves in the total reserves. This is so because these variables are reduced in size in the event of an issue. The firms that have made the issue·s twice or more times have the highest changes in cash from operations, earnings, growth in earnings, shareholders' funds and total reserves as well as the lowest returns on investments. Re-capitalization increases the investment thus increasing the earnings realized and consequently, the growth in earrings. The frequency in the issues is related to the firm size. Financial and industrial sectors have the highest concentration of the distributions. Some of the characteristics so established vii confirm the Lev and Lakonishok's (1987) findings. The study proves that only two (total reserves and dividend yield) out of the fourteen variables are significant for prediction purposes. This means that managers may be using non-quantitative considerations in deciding whether or not to issue bonus shares and thus indicating that there exists a gap between finance theory and practice in the issue of Stock Dividends in Kenya. -.