The effect of rights issue announcement on share prices of companies listed at the Nairobi securities exchange

Abstract

The study sought to determine whether a rights issue announcement has an effect on the share prices for companies listed at the Nairobi Securities Exchange who have in the past 5 years had a rights issue. An event study methodology, employing the market model, was applied to determine the abnormal returns both on and surrounding the rights issue announcement date. Data was collected from 8 companies that met the sample criteria used, with secondary data from the NSE capturing stock prices, market index, and announcement dates being collected for 20 days before and after the rights announcement. Data was analysed through the use of the T-test on the daily share prices and trading volumes over the event window to determine whether there was a significant effect of share price and trading volume on rights issue announcement. The study found that the Kenyan market reacts positively to rights issue announcements, with an increase in volumes of shares traded after rights issue as compared to those before the rights issue. Additionally, managers of the companies sought rights issues to encourage investors to purchase their stock which appeared cheaper. There were positive mean returns with respect to rights issue announcement. Consequently, there is an effect of rights issue before and after rights issue is done on a particular security. This implies that the null hypothesis was not accepted and instead, the alternative was as there indeed was a relationship between rights issue announcement and share prices. The study recommends that with future rights issues coming, particularly if the debt capital markets remain tight and lending banks continue to limit their advances, will require a better analysis to increase the market capitalizations for the companies issuing the rights. It remains to be seen whether institutional investors will continue to support those companies who have not sought to strengthen their balance sheets to date or need to raise even more capital from shareholders. Future issues which the market will monitor closely are whether there will be a rise in rights issues given that it is a cheaper and sometimes faster means of raising needed capital to boost growth. This arises where an investor sells enough of its trade-able rights to acquire the balance. Institutional investors may start to take this route where they are not prepared to fully support the deals.