The Effect of Stock Splits on Stock Returns of Firms Listed at Nairobi Securities Exchange

Abstract

Stock split is an action by which a company lowers the face value of its stocks, simultaneously increasing the number of outstanding shares, but keeping the company's total capital base intact. Over the years the relationship between stock splits and stock returns has been a subject of continuing interest to economists and practitioners. The objective of this study is to determine the effect of stock splits on stock returns of firms listed at the Nairobi Securities Exchange. An event study research design was used. This study focused on 14 firms that have spilt their stocks between the years 2004 and 2014. However, the study managed to collect secondary data from seven (7) firms out of 14 firms that had split their stocks in the study period (2004-2014). This represents a response rate of 50% which was considered reliable for making generalizations of the whole population. The event window consisted of 61 days. Share price index for 30 day pre and 30 day post-split announcement date was used. The study found that stock-splits impacts positively on stock returns, the findings observed that four companies reacted positively to stock splits in the event period. The study recommends that since stock split is a new phenomenon in the Kenyan market, capital markets authority should encourage listed firms to split their stocks to boost their stock returns. The study also recommends that local and international investors should be educated about trading at NSE in an attempt to encourage long-term investments other than short-term. This will help firms to minimize abnormal reaction of prices caused by speculative trading by retail investors. Future researchers interested in this field of study should consider covering a longer event period to establish whether they will get similar results.