Effects of Stock Split and Rights Issues on Share Price of Companies Listed on the Nairobi Securities Exchange

Abstract

The right issue give current shareholder a choice of buying the firm’s new shares which are normally issued at a discount to prevailing market price in order to boost participation in the firm’s process of capital generation. This study aimed in identifying effects of rights issue and share split on share prices for listed Kenyan-based companies at the Nairobi Securities Exchange. The target population of this research made up of companies listed at the NSE as at 31st December 2014. In total there were 62 companies listed as at December 2014. This targeted all Kenyan based companies that are in the NSE 20 share index and those that had undertaken rights issue and stock split between 2009 and 2014 where the sample was made of 7 companies that have undertaken stock split and 7 companies that have undertaken rights issue between 2009 to 2014. A sheet was generated to collect secondary data on daily closing share prices and stock split pronouncements for a time of 30 days before and 30 days after each rights issue and stock split announcement. The study concludes that the stock price for Kengen decreases before the day of stock split and rights issue and the prices of shares increase gradually after the split and rights issue and that the average market showed both zero and non-zero pre-event returns. However, the zero returns were for less than one day and the remaining days sustained non-zero returns. Further, the study concludes that share price reacted sharply before and after the stock split and rights issue for Uchumi and that a sharp increase in share price was reported 20 days before the stock split and rights issue and a further decrease in stock price after the stock split and rights issue. Further, the study concludes that zero-increase in share price during pre-stock split and rights issue for Mumias. Kenya Commercial bank recorded non-zero price increase for its share in both pre-stock split and rights issue and post stock split and rights issue. This result indicates the stock split and rights issue has no impact on the share price for KCB. In addition, the study concludes that share price for BAT rose steadily during pre-split and rights issue and post-split and rights issue period. The study also concludes that stock split and rights issue has significant effect on share prices for firms listed at the Nairobi Securities Exchange for period from 2009 to 2014.