The effect of stock split on share prices of companies listed at the Nairobi securities exchange

Abstract

Stock split encompasses the technique of psychological pricing where new prices are more attractive to the incoming retail investors as well as fulfilling to the existing shareholder. Knowledge of share prices and its movement enables investors to choose the companies in which to invest in wisely. The objective of this study is to investigate the effect of stock split on stock prices for firms listed at the Nairobi Securities Exchange. This study employed an event study methodology where the effect of stock split on share price was investigated for a period of 181 days in pre and post stock split date. The study covered the period between 2009 and 2013 with a sample size of 7 companies. Secondary data collected from NSE on the daily stock prices of the 7 companies and the NSE 20Share price index for 90 day pre and 90 day post-split announcement date was used. This study established that the events of stock splits announcements affect stock prices almost immediately and that on average; it takes 3 day for prices to react to stock splits. In conclusion, this study established that stock split positively impacts on the share prices and hence recommends that CMA reviews the policy on this event to encourage firms to adopt stock splitting, educate the public on the operations at the NSE to reduce abnormal reaction of prices caused by speculative retail trading. This will be in a bid to encourage more long-term investments than short-term ones as well as impart knowledge on the public regarding stock market activity. The study also recommends that NSE should maintain a record of the dates of various events and make the information available to encourage scholars to undertake research on these events. That way, they will gain from the research and researchers would have easy access to information regarding stock split. Lastly, CMA should ensure compliance with insider trading laws, guidelines, rules and regulations by effectively monitoring the market. This will eliminate incidence of: collusion between brokers and traders, inside trading and leaking of information hence, boost investor’s confidence.