Effect of Rights Issue, Bonus Issue and Stock Split Announcements on Share Returns of Firms Listed in Nairobi Securities Exchange

Abstract

Several studies on rights issue, bonus issue and stock split announcement have been performed in different stock markets around the globe, resulting in mixed outcomes. Some of the studies discovered that these announcements led to beneficial effect on share return; others reported adverse effect on share return while some studies discovered no market response on share returns. The statement of the problem was derived from the mixed outcomes from such studies coupled with the fluctuating market value of shares of firms listed in the Nairobi Securities Exchange. The objective was to find out the effect announcement of rights issue, bonus issue and stock split has on share return of firms listed in Nairobi Securities Exchange. The following theories were the foundation of the study; efficient market hypothesis, modern portfolio theory and signalling theory. Target population comprised all companies in the Nairobi Securities Exchange register that announced bonus issue, rights, and stock split from 2014 to 2020. There were 6 companies which announced rights issue, 17 companies which announced bonus issue and 2 companies which announced stock splits. The study employed event study methodology whereby collection of secondary data was done for thirty days before and after respectively for each bonus issue, rights issue and stock split announcement. Statistical bias was eliminated by using normality and autocorrelation tests there after the Mean Adjusted Return Model was used in determining expected returns and abnormal returns. Research finding was the basis for drawing the conclusion and recommendation. In all the companies there were abnormal returns which prove that the announcements had an effect on share returns, sixteen companies witnessed increase in abnormal returns while nine firms witnessed decline in abnormal returns following the announcements. To whether the effects were noteworthy null hypothesis postulating that the announcements had significant effect on share returns of firms listed in Nairobi Securities Exchange was accepted for twenty-four firms and rejected for one firm. The conclusion was that right issue, bonus issue and stock splits announcements have a significant effect on Share returns. The study recommendations include that; the Nairobi Securities exchange should support research by providing data free of charge for interested researchers. The Capital Markets Authority and NSE should educate investors on the investment opportunities available and this will increase local investors in the bourse, currently most inventors are foreigners. NSE and CMA should beef up surveillance in the market so as to curb insider trading especially when companies are about to make any form of corporate announcements.