The Effects of Rights Issue Announcement on Stock Returns of Firms Listed in Nairobi Securities Exchange

Abstract

Rights issue is a secondary equity issue in which new additional shares are issued to the existing shareholders in exchange for cash (capital) needed by a publicly quoted company, either for expansion purposes or to finance company operations. The rights are issued to the shareholders in the proportion of their existing holdings. The few available studies give mixed results on the direction of stock returns upon a rights issue announcement. There has been no consensus on how capital markets generally respond to rights issue announcement. The objective of this study was to investigate the effect of rights issue announcement on stock returns of listed companies. This study adopted a descriptive research design and a sample of twelve listed companies, which issued rights between January 1, 2007 and August 31, 2014 were used to meet the objective. The required data for this study was collected from NSE and using event study model and Microsoft excel, descriptive statistics and statistical correlation was used to analyse the data and the significance of the findings tested using the two tailed t statistic at 95% significance level. This study found that stock prices and returns changed significantly in the post announcement period than in the preannouncement period. Analysis of mean abnormal return revealed that rights issue announcement result into either positive or negative stock return. The general conclusion of this study based on the generated CAAR is that rights issue announcement results into a negative abnormal stock return on listed firms. This study recommends that investment banks and listed companies to consider the negative abnormal stock price reactions and the subsequent negative abnormal stock return changes to the announcement of rights issue, when setting the discounted rights issue prices to ensure that during the issue period, the stock trading prices do not fall below the rights issue price, a fact that can lead to the collapse of the rights issue exercise