Effects of share split in a listed company a study of the Nairobi Stock Exchange.

Abstract

The general objective of this study was to determine whether share split made by firms listed on the NSE during the period 2004 to 2007 had any valuation effect on the splitting firm. The specific objectives of the study were: (i) To determine whether there is a significant relationship between share split announcement and the splitting firms share price; (ii) To determine the effect of share split announcement on the splitting firm’s liquidity; (iii) To determine the effect of a share split announcement on share risk by examining the trend in the share returns following a share split announcement. The standard event methodology was adopted in this study. The methodology involved measuring trading trends during the events window using a prior estimation period for comparison. The study used the entire population of eight firms listed at the NSE and have made stock split announcement during the period 2004 to 2007. The data collection instrument was based on market model. Data on stock prices and market indices was collected using the observation guide for a 61- day event window (pre-event window) .The collected data was analyzed using regression analysis as well as the two tailed t-test to measure the statistical significance of the cumulative abnormal returns (CARs). The research findings of the study were threefold. First, sharesplits by the splitting firms do not result to any significant changes in the valuation of their shares at the Nairobi Stock Exchange. Secondly, share splits of the splitting firms experience liquidity effects around the respective ex-dates. This is because the number of trades seems to increase, lending some support to the hypothesis that the trading by small investors increases post-split. Thirdly, share splits result to significant changes in shares betas of the respective firms. This implies that share splits are associated with changes in the shares’ systematic risks, measured by the share’s market model Beta. This is due to a significant shift in investor clientele, which further fuels share volatility. The study recommended that due to the liquidity effects around the ex-dates, the management of listed firms should propose share splits as a measure of making their shares more attractive and affordable to small investors. In line with “the neglected-firm hypothesis”, the listed firms may use the split to both draw attention and ensure that information about the company is going to be spread wider than before. This will enhance both the image and the reputation of the firm. To cushion investors against the after-effects of share prices volatility, the management of the NSE should formulate guidelines of trading around the ex-dates. The study relied on data from secondary sources. Therefore, it was proposed that further research should incorporate a survey of the conditions and the strategic objectives that drive the management of listed firms into announcing share splits.