The Impact of Bonus Issue on Share Prices of Companies Quoted in Nairobi Securities Exchange

Abstract

This study intended to examine the impact of bonus issue on share prices in order to test the semi strong form of market efficiency. Event study methodology was employed in this study. The question of whether the announcement of issuance of bonus shares by quoted companies is news to stock market participants or it is anticipated by the market has been the subject of research. If the announcement is anticipated, then stock prices should not change drastically during the days surrounding the announcement date. The study made use of daily adjusted prices for sample stocks for the event window of 29 days consisting of 14 days before and 15 days after the event date. The population of interest comprises of 62 listed companies in the NSE since these are companies that have met the listing requirements. There are a total of 21 bonus issues between the years 2009 to 2012. A sample of fourteen bonus issues in the period between years 2009 to 2012 were used. The student t-test statistic was employed to test the significance of the average abnormal returns and cumulative average abnormal returns from zero. It is possible to profit from bonus share announcement when the abnormal or abnormal returns are significant from zero. The results of t tests on the average abnormal return (AAR) and the cumulative average abnormal return (CAAR) indicated that abnormal returns were significantly different from zero which implied that implied that there is an anomaly in the semi-strong form efficiency of the NSE with regards to bonus announcements as it is possible to profit from such announcements which is regarded as news by NSE investors.