The effect of bonus issue announcements on share prices of commercial banks listed at the Nairobi Securities Exchange

Abstract

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. This research employed the event study methodology by using the bonus announcements of eight NSE listed banks that occurred during the year 2009 to 2013. The 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 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. This study analyzed the share price performance of listed banks in the Nairobi Stock Exchange before and after bonus issue announcement. The share prices of listed banks during the event study and NSE month end indices for the period between 2009 and 2013 obtained from the NSE were analyzed using the event study market model where abnormal returns (AR) and cumulative average abnormal returns (CAAR) were derived. The results are displayed in APA tables and graphs. The study established that there is a relationship between bonus issue announcement and performance of share prices of listed banks in the Nairobi Stock Exchange (NSE) in Kenya. Majority of the banks experienced share price fluctuations immediately and after the bonus issue announcement.