The effects of stock splits announcements on stock prices of publicly quoted firms in Kenya.
Koech, Peter Kiprono
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A stock split is an intriguing phenomenon that has remained the subject of interest for academicians as well as for practitioners. Even though stock splits, per se, at least theoretically, should not alter company’s profitability or ability to generate future cash flows, they have continuously attracted the attention of, inter alia, stock market participants since the empirical evidence documented by a number of researchers contradicts the assumption of efficient market hypothesis and provides conspicuous input data for further analysis. In spite of the algebraic simplicity, this firm–specific event has induced different reactions concerning various stock characteristics observed in a variety of capital markets all over the world what, in turn, perpetuates the state of an uncovered mystery. There are several theories that have been advanced to explain why companies split their stock. The most common ones are to achieve an optimal price range for liquidity, to achieve an optimal tick size and to signal management’s confidence in the future stock price. Enhanced liquidity is one possible motivation for stock splits but empirical research frequently documents declines in liquidity following stock splits. Despite almost decades of inquiry in international markets, little is known about all the changes in a stock's trading activity following a stock split. This study examined the effects of stock splits announcements at the Nairobi Securities Exchange (NSE). Stock splits events are relatively new in the NSE and there are few studies in the Kenyan stock market done on stock splits. Moreover, most studies done both locally and internationally have produced inconsistent results. This is what informed this research. The study’s specific objectives include determining the length of time it takes for stock prices to adjust, the direction of price change due to stock split news and the extent to which price changes are sustained after stock split news become available. The general objective of the study is to find out the effect of stock split announcements on the stock prices of selected firms in the NSE. These objectives were achieved by studying a sample of 5 firms out of the 13firms that have undergone stock splits during the period 2004 to 2012. The study analyzed price changes to determine whether stock splits announcements elicit any reaction in the Kenyan market. The daily adjusted prices for sample stocks were recorded during the event window of 61 days, consisting of 30 days before and 30 days after the stock split. All the event days stock prices data was captured. The study adopted a descriptive research design. Here, an attempt was made to explain the relationship between stock splits announcements and stock price changes. The event study methodology was employed in the determination of the effects of the split announcement. The scope of the study was confined to stock split events and an assumption that there is no other event at the time of the stock split made. This is what informed the use of a single factor model to analyze the research data and t-tests conducted to test the significance.