MARKET REACTION AROUND BONUS ISSUES AND STOCK SPLIT IN PHARMACEUTICAL INDUSTRY Submitted By: NIMISHA. M. BABU 1020251 Under the Guidance of: PROF. ANIRBAN GHATAK CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT BANGALORE CHAPTER- 1 INTRODUCTION 1. 1BACKGROUND OF THE STUDY BONUS ISSUE Bonus issues are simply distribution of additional stocks to the existing shareholders. It is a “free” issue of shares, without a subscription price, made to existing shareholders in proportion to their current investment.
A firm can distribute bonus shares by using retained earnings or accumulated capital reserves.
The relationship between Bonus issues and share prices has been the subject of much empirical discussion within the finance literature. Empirical research (particularly in US) has shown that the market generally reacts positively to the announcement of a bonus issue. The hypothesis that has received strongest support in explaining the positive market reaction to bonus issue announcements is the signalling hypothesis.
A company can distribute bonus stocks by using retained earnings or accumulated capital reserves. If a company distributes a bonus issue by using retained earnings, it makes a book entry to allocate retained earnings into paid- capital in the stockholders‘ equity section of the company balance sheet.
Alternatively a company if decides to distribute a bonus issue by using accumulated capital reserves, it adjusts the accumulated capital reserves into paid-up capital.
In both the cases the company does not receive any cash. Thus they result in each stockholder holding a greater number of stocks, but with more stocks on issue their relative claim on the assets of the company is smaller. There is no effect on stockholder‘ s proportional ownership of stocks, capital structure and financial position of company.
Since bonus issues do not enhance earning power, change the firm‘s capital structure, or result in expense reductions, the total market value of the firm in absence of information asymmetries should remain the same Only modification triggered by the bonus issue is that the number of outstanding stocks is adjusted by the bonus issue ratio, therefore, the price of the stocks declines according to the same bonus issue ratio The total market value of the stocks or the value of the stocks that are held by each investor should remain unchanged.
STOCK SPLITS Stock split is reduction in denomination (face value) of the shares. Shares in the past were issued in standard denominations such Rs. 10, Rs. 100, etc. Over many years with performance and growth, the share price of some of the companies has appreciated. E. g. Grasim has a face value of Rs. 10 however; the price of one share in Grasim is Rs. 2600. For small investor this may appear a little beyond his or her means to own the shares in Grasim. This problem of owning shares was more pronounced when securities were traded in lots of 50 sharesand100shares.
Therefore to make appear the security price within the reach of small investors, the companies decide to split the stock denomination (face value). When stock denomination are split say from Rs. 10 to Re. 1, the market price is adjusted in same proportion. In case of the stock splits the par value of the shares is decreased. The amount of shares to be issued is increased in proportion to the reduction in the value of the shares. Essentially, if you have 10 shares of face value of Rs 10 each, you will have 50 shares of Rs 2 each if a company puts through a 10-to-2 stock split.
When a company splits its stock, you have more shares but of a lower denomination. So the value of your holdings should remain unchanged. The implication is that by splitting the shares even small investors can afford to buy the shares of large company 1. 2STATEMENT OF THE PROBLEM Empirical studies in India and abroad have proved that there is significant abnormal return around bonus issue announcement. These have been mainly proved using event study and proving the signaling hypothesis.
The current study is to identify whether the announcement of bonus issue and stock split has any impact on the stock price. 1. 3OBJECTIVES OF STUDY The various objectives are * To analyze the impact of announcement of stock split and bonus shares. * To investigate whether this would lead to superior profitability. * To see whether there is any abnormal returns after the announcement of bonus issue and stock split * To find out the most important determinants of buying decision making of companies announcing bonus shares 1. 4RESEARCH METHOD
The research methods would be event study and signaling hypothesis. This can be done with the help of tools like T-tests and graphs. 1. 5EXPECTED CONTRIBUTION AND SIGNIFICANCE OF THE RESEARCH The research contributed towards the factors that lead to abnormal returns on announcement of bonus issue and stock splits. The research helps us to analyze the market reaction on announcement of stock splits. 1. 6STRUCTURE OF THE THESIS Empirical studies in India and abroad have proved that there is significant abnormal return around bonus issue announcement.
These have been mainly proved using event study and the signaling hypothesis. The study would provide an insight into the problem of whether there is any change in the stock price on issue of the bonus shares and stock split. This would be done by building a model by using tools like T-tests. But the study is limited only to Pharmaceutical industry. This is a major limitation and hence this could be extended to all the stocks. CHAPTER- 2 REVIEW OF LITERATURE REVIEW OF LITERATURE Importance of Review of related literature:
The initial search proved that there are not many exactly related studies and articles with this study. The studies were related to how stock markets react to bonus issue announcement, most of them done to prove the efficient market hypothesis. These reviews helped for analyzing the capital market reaction to stock splits. The literature review serves as a guide for the analysis of results. Literature Review Methodology: The methodology used for literature review is that of secondary research. After a general study on related studies, these were divided as Indian studies and foreign studies.
The literature review proved a need for such a study as adequate research were not done on this topic. The sources of literature include published articles from journals, Internet, thesis and related studies, books and magazines and newspapers 1. An empirical analysis of market reaction around the bonus issues in India by Dr. A. K. Mishra1(1998): Author Dr. A. K. Mishra Objective This study examines the stock price reaction1 to the information content of bonus issues with a view of examining the Indian stock market is semi-strong efficient or not. Tools used
T-tests Patell tests Cowan’s non-parametric tests Conclusion This study documents the market behaviour around the bonus announcement date for 46 stocks listed in National Stock Exchange of India over a period 1998 to 2004. An event study was conducted using a 180 day event window. It was found that on an average, the stock starts showing abnormal returns nine to eight days before the announcement date . This may be due to leakage of information. The CAAR for all these days are also significant. On the announcement day there was an excess return of -0. 10%. . . Intra –industry reactions to stock split announcements by Ranjan D Mello(2002): Author Ranjan D Mello Objective They have examined on average that the non-splitting firms shareholders experience positive and significant abnormal returns at the stock split announcements of their industry counterparts. In addition, industry wide and firm specific characteristics are important determinants in explaining nonsplitting firms’ stock returns. These firms’ earnings increase significantly, and the earnings changes are positively related to the stock price reaction.
Finally we find no evidence that the investors revise the value of nonsplitting firms because they anticipate a decline in earnings volatility. Tools used F test and T- Test Conclusion of the study Their objective is to find out whether the non-splitting firms shareholders experience positive and significant abnormal returns at the stock split announcements of their industry counterparts. 3. Price Effects Associated with Changes in the Standard & Poor’s 500 Index Composition: The Removal and Replacement of Seven Non-U. S. Companies by Alexander Peterson: Author
Alexander Peterson Objective This paper examines price effects associated with additions and deletions to the Standard and Poor’s (SP) 500 index. Tools used Two different methods are used to analyse the results for both additions and deletions. In the first set of results an event study methodology is used. In the second set of results matching portfolio methodology is used. Both of these methods are employed for the same purpose: to detect abnormal returns. Conclusion This paper examines the price effects related to the removal and replacement of seven non-U.
S. companies in the SP 500 index on July 19, 2002. This research is interesting because it provides a setting in which the companies being added or removed from the index are independent from the normal distorting factors 4. Review of capital market efficiency: some evidence from Jordanian market by Mahdi M Hadi: Author Mahdi M Hadi Objective The objective of accounting numbers is to provide the financial data about the performance of certain enterprise in order to help the managers, investors, shareholders and government authorities in making their decisions.
On the other hand, the purpose of accounting research is to evaluate the usefulness of accounting data to investors and other users. Furthermore, the purpose of capital market research is to examine the association between accounting numbers and security return and to test whether or not accounting data carry any information content to security market, and if so it should be impounded in the security price, the results show the security market reacted with mixed signal on releasing profitability, liquidly, and solvency information. Tools used Serial correlation tests * Filter rule tests * Cyclical tests * Volatility tests * Six regression equations were used in this analysis Conclusion This paper identified EMH and provided some detail on the types of EMH, as well as identifying the empirical research that tested weak, semi-strong and strong forms of market efficiency. Accounting market based research more often assumes that market is efficient in semi-strong form, and the reason for this is that financial reports are considered public information once they are released to the market.
In this paper empirical evidence has been provided from Jordanian market, and it shows the security market reacted with mixed signal on releasing profitability, liquidly, and solvency information. The selection of the relevant pricing model is very critical in market-based research. Brown and Warner (1980) investigate how different methods performed when some abnormal performance was present. They conclude that ” There is no evidence that more complicated methodology conveys any benefit. 5.
An analysis of stock splits in the Istanbul stock exchange by: ISIL SEVILAY YILMAZ: The empirical findings about the level of liquidity indicate that there is a slight decline in liquidity in the post-split periods. Analysis of the relationship between firm characteristics and share prices shows that firm size has a positive effect on share prices. The effect of investor base on share prices could not be identified. Finally, the estimation of the logit model utilized in the study to determine the probability of firms to split does not reveal any statistically significant result.
Research tool- Copeland’s original FTSM model. Conclusion of the study the study aims to find out the validity of the trading range hypothesis as a basis for split decisions of Turkish companies. The “trading range hypothesis” states that there is an optimum trading price range for each stock and that through stock splits managers aim to attract new money and shareholders by bringing the stock prices into this optimum and presumably preferred range 6. McNichols and Dravid (1990) Objective rovided further evidence to support the signaling hypothesis by examining the relationship between the size of a stock dividend (or split factor) and the degree of abnormal returns around the announcement dates. Their findings suggested a positive relationship between stock dividend size and abnormal return; that is, the larger the stock dividend, the greater the signaling benefits. 7. Stock Splits: Signaling or Liquidity? Evidence from the Options Markets by Ghulam Sarwar Author Gulam Sarwar Tools used Direct tests and indirect tests Conclusion
We found that the information in most cases were first reported (typically on the announcement date) in Business Wire and PR Newswire – First Call. The Wall Street Journal usually reports split information on the trading day after the announcement date. Thus the day that a spilt is mentioned for the first time in the WSJ cannot be interpreted as the announcement date for the split, unless the split was announced after the close of trading on the previous day 8. Baker and Gallagher (1980) surveyed 100 chief finance officers on their perceptions about stock splits.
The conclusion drawn from the 63 responses received was that stock splits serve to keep the stock price in an optimal range, thereby, increasing liquidity and the number of shareholders. 9. Market reaction to stock splits: empirical evidence from the Nairobi stock exchange by chemarun caroline(2010): Author Chemarun Caroline Objective This paper examined the effect of stock splits at the Nairobi Stock Exchange. This was achieved by studying nine companies that had undergone stock splits in the period 2002 to 2008. The study made use of the trading activity ratio to determine whether stock splits elicit any reaction in the Kenyan market.
Tools used t-tests Trading activity Ratio Conclusion The study also made use of the Nairobi Stock Exchange Daily Price Index as a proxy for computing market return The study made use of daily adjusted prices for sample stocks for the event window of 101 days consisting of 50 days before and 50 days after the event date. The event study methodology was used to assess if there was any abnormal market reaction to announcement of stock splits. This was done by comparing the trading activity ratio of companies sampled before and after the stock split. 10. A study in U. S. by Papaioannou et al. 2000) analyzing price reaction to stock dividend announcements by firms listed on the Athens Stock Exchange found no statistically significant abnormal returns on and around the announcement date. The results of this research can be explained by the fact that most stock dividend distributions are compulsory requirements imposed upon the firms to satisfy regulatory requirements and shareholder approval must be sought regarding the size and terms of the distributions. 11. Baker and Powell (1993) surveyed 251 New York Stock Exchange and American Stock Exchange firms that issued stock splits.
The responses of 136 firms reveal that the primary motive for issuing a stock split is to move the share price to a better trading range, resulting in improved trading volumes. Some other important motives include signaling better future prospects to attract potential investors. The respondents also expressed the view that the preferred trading range for their stocks is $20 to $35. 12. In India Ramachandran (1985), examined the impact of announcement of bonus issues on equity stock prices and found mixed evidence for semi strong form efficiency of Indian stock market. 13.
Banker, Das, and Datar (1993) investigated the cash substitution hypothesis by examining the market reaction to firms who announced they were discontinuing cash dividends, but maintaining an existing level of stock dividends. They found a positive (although statistically insignificant) abnormal return followed these announcements. Banker, Das, and Datar also found that firms with no prior stock dividend history who announced that they were discontinuing cash dividends experienced significantly negative share price reactions, supporting the cash substitution hypothesis. 4. Miller and Modigliani (the Modigliani-Miller Theorem, 1961) demonstrated theoretically that bonus issues, along with other types of dividends, do not alter shareholder wealth. If a company plans to finance a bonus issue from retained earnings, it makes a book entry to allocate retained earnings into paid-up capital in the shareholders’ equity section of the company balance sheet. Tools used State verification model Conclusion Finally, Miller and Upton (1976) show that firms are indifferent between leasing and buying capital, except when they face different tax rates.
In summary, the most profound and lasting impacts of the Modigliani-Miller Theorem have been this notion of “even footedness” and the systematic investigation of the Theorem’s assumptions. The approach has motivated decades of research in economics and finance in a search for what is relevant in a host of economic problems (between borrowers and lenders, governments and citizens, and countries). As Miller (1988) said, “Showing what doesn’t matter can also show, by implication, what does. ” 15. Liquidity changes around bonus announcement, by Ms.
Madhuri Malhotra1, Dr. M. Thenmozhi & Dr. G. Arun Kumar, Feb 2007: Author Arun Kumar Objective Liquidity refers to the ease of converting assets into cash at minimal costs. Tools used Enhanced trading liquidity tests T-tests Conclusion This paper examines the stock market reaction and Liquidity changes around the bonus issue announcement of the chemical companies in India The analysis shows that bonus issues have a signaling effect but the effect is inversely related to stock price changes 16.
Grinblatt, Masulis and Titman (1984) provide empirical evidence indicating that stock prices, on average, react positively to stock dividend and stock split announcements. 17. Lakonishok and Lev (1987) analyze the behavior of two major indicators of corporate performance: growth in earnings and in cash dividends. Lankanishok and Lev (1987) investigated Liquidity Hypothesis, which suggests that stock dividend announcements are intended to improve liquidity, as the creation of additional stocks should lead to an increase in trading and greater ownership dispersion in a firm.
Evidence of a positive and significant link between liquidity improvements and stock price adjustments is also documented by Beneish and Whaley (1996), and Lynch and Mendenhall (1997) (hen securities are announced to be added to S&P 500 list), and by Elyasiani et al. 18. Ho et. al. (2002) examined whether there is any liquidity change between the pre issue period and the post issue period of Seasoned Equity offerings using data from Taiwan market. They find that there is a statistically significant increase in liquidity (measured by number of shares traded divided by number of shares outstanding) when firms make seasoned equity offerings.
Furthermore, the liquidity enhancement appears to bear no significant connection with the issuing size, the issuing price, and the market value of the issuing firm. 19. The paper “The Impact of Stock Splits on Price and Liquidity on the Stock Exchange of Thailand” by Pantisa Pavabutr, & Kulpatra Sirodom, 11 (2008) Author Pantisa Pavabur Objective explores the impact of stock splits on stock price and various aspects of liquidity using daily and intraday data from the Stock Exchange of Thailand between 2002-2004.
We provide evidence that reductions in trade frictions and increases in split-adjusted price levels are associated with the size of split factors and post-split trading range. Stocks with high split factors have better post-split adjusted price performance and lower trade bid-ask spreads and price impact. The empirical findings lend support to the trading range hypothesis of stock splits. 20. Earlier studies regarding decision making under uncertainty was conducted by Kahneman and Tversky (1974).
This study reveals three heuristics that are employed in making judgments under uncertainty: representativeness, availability, and anchoring. 21. Market Reaction to Bonus Issues and Stock Splits in India: An Empirical Study : Fama (1970) recognized three forms of market efficiency explicitly: the weak, semi-strong and strong. Efficient Market Hypothesis (EMH) signifies that all appropriate information is quickly and fully assimilated in a security’s market price, thereby guessing that an investor will obtain an equilibrium rate of return. In other words, an investor in the market should not anticipate an abnormal return. 2. Market Reaction Around the Stock Splits and Bonus Issues: Some Indian Evidence, by Satyajit Dhar and Sweta Chaochharia, Jan 2008:Efficient Market Hypothesis (EMH) states that all relevant information is fully and immediately reflected in a security’s market price, thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return. Tools used Capital Asset pricing model T tests Conclusion The study found that bonus issues result in sharp spike on the announcement date.
Stock splits announcements are resulting in positive returns during entire event window although effect on announcement date is not that sharp. It may be due to the fact that stock splits are more common for momentum stocks whereas bonus issues are made for all type of stocks. This phenomenon may need further exploration. 23. Foster and Vickrey (1978) were among the earliest to examine the signaling hypothesis using daily returns data and in their examination of the information content of 82 stock dividend announcements, they found significant positive abnormal returns around announcement dates. 24.
Does bonus issue signal superior profitability? A study of the BSE listed firms by Jijo Lukose J(2002): Author Jijo Lukose Objective This paper investigates the operating performance behaviour around bonus distribution for a large sample of firms listed on Bombay Stock Exchange (BSE) to examine the relevance of signalling hypothesis in India. Tools used Standardised cross sectional tests Generalised sign tests Conclusion The study says that these firms exhibit superior performance compared to control firms matched on the basis of industry and size and to another set of control firms based on industry and pre-event performance.
We observed statistically significant positive abnormal return of 11. 60% for five days starting from day –3. Our further analysis reveals considerable difference in the operating performance and announcement return across firms belonging to different ownership groups. This may be due to the difference in corporate governance mechanisms. In general, our evidence is consistent with signalling based explanations. 25. Balachandran et. al. (2004), examines share price reaction of the announcement of Bonus share issues for a sample of Australian companies over the period 1992-2000.
They found that bonus issue announcement leads to a statistically significant positive price reaction. They provide evidence in support of signaling hypothesis consistent with the findings in the United States, Sweden, Canada and New Zealand. However, this study qualifies this result by suggesting that the signaling effect is stronger for industrial non-financial and mining companies than for financial companies Tools used SCST – Standardised cross-sectional t-test. GST – Generalised sign test. MEAR – Mean adjusted return model. MM – Market model.
KS test – Kruskal-Wallis test. MW test – Mann-Whitney test. Conclusions This study examines the price reaction to bonus issues announcements. Bonus issue announcements led to statistically significant positive price reaction around announcement dates for uncontaminated and contaminated events. Announcement period reaction did not differ significantly between uncontaminated and contaminated groups. The magnitude of price reactions to bonus issue announcement found to be statistically significantly related to the size of the bonus issue and preannouncement effect. 6. Grinblatt, Masulis and Titman (1984) provide empirical evidence indicating that stock prices, on average, react positively to stock dividend and stock split announcements. 27. Managerial Motives for Stock Splits: Survey Based Evidence from India Objective The major motives for issuing stock splits in India are to improve liquidity of a firm’s shares, to bring the share price down to a popular trading range and to attract new investors. The results also show that around ninety percent of managers prefer their shares to trade below Rs. 00 (approximately $9, as per the exchange rate in August 2010). Tools used Independent Samples t-Test for Manufacturing Sector and Service Sector Groups Conclusion This research study does not directly test the hypotheses about stock splits; it simply presents the results of the questionnaire survey conducted in order to find out managers’ opinions about stock splits and motives for issuing them. Although a consensus does not make a hypothesis true or false, it does provide insight about how managers view certain hypotheses (Baker and Phillips, 1993).
Second, survey research methodology is subject to non-response bias; however, the reasonably good response rate found in this study mitigates this concern. 28. Ghosh and Woolridge (1988) found that negative share price reaction to dividend cuts and omissions could be offset or lessened by an announcement of a stock dividend as a substitute. This finding lends support to the cash substitution hypothesis, which suggests that firms can conserve cash by issuing a stock dividend as a temporary substitute for an existing or contemplated cash dividend 29.
Behavioral Finance, by Martin Sewell (University of London), 2008. Author Martin Swell Objective This report is an introduction to behavioral finance, the history and evolution of behavioral finance, including the heuristics as proposed by Daniel Kahneman and Amos Tversky in 1973 and how it has formed a fundamental basis for this field. This report also contains a introduction to the prospect theory, which is a descriptive model of decisions made under circumstances of risk. Conclusion Affect: The affect heuristic concerns `goodness’ and `badness’.
Affective responses to a stimulus occur rapidly and automatically: note how quickly you sense the feelings associated with the stimulus words treasure or hate . Availability: Availability is a cognitive heuristic in which a decision maker relies upon knowledge that is readily available rather than examine other alternatives or procedures. Similarity: The similarity heuristic leads us to believe that `like causes like’ and `appearance equals reality’. The heuristic is used to account for how people make judgments based on the similarity between current situations and other situations or prototypes of those situations. 0. Psychology of Investing, By Kirby Cochran (North point Advisors) 2008. Author Kirby Cochran Objective This report explores why investors are emotional and allow them to drive investment decisions. It details the ways of culling the herd behavior and with real life examples, explains the twin emotional powers of Greed and Fear. Other information includes why greed causes investors to buy at the wrong time and why fear causes investors to sell at the wrong time. Investor behaviour is best understood in emotional terms rather than rational terms. 31.
According to michelle barne and Shiguang maa the issues with a high ratio usually attract positive returns for both Chinese and foreign residents. Issues with a low ratio are rewarded with negative returns for A-share traders and do not stimulate significant activity by B-share traders. The hypothesis of semi-strong form market efficiency is rejected only for smaller issues traded on the A-share market; the B-share market displays stronger evidence of semi-strong form market efficiency than the A-share market. Finally, there appears to be additional informational content in the approvals of issues above and beyond that of the proposals.
Tools used * Parametric T-test * Event * Event window * Estimation window * Estimation model * Investigation window Conclusion The event study methodology was employed to investigate the stock price behaviour in response to the bonus issues and then to determine whether or not semi-strong form efficiency holds for the new emerging stock markets of China. In addition, we explored the issues of how the announcements affected shareholder wealth and how the response of traders to these announcements differed for Chinese and foreign residents. 32.
Dolly32 (1933) surveyed managers of eighty-eight companies issuing stock splits; the finding of the survey was that the main motive for issuing stock splits is to widen the distribution base among the shareholders. This leads to increased marketability of the share and enhanced advertising value of the company. Corporate managers believe that a wider distribution of shares leads to a steadier volume of trading. The other reasons for issuing stock splits are to receive higher effective dividend rates, to facilitate the sale of stocks, to permit listing of the stocks and to create goodwill in the stock market. 3. An Empirical Analysis of Stock Market Reaction Around Bonus Issue Announcement in the Colombo Stock Exchange: An Empirical Study Based on the Period of 2003–2007 by Pratheep Francis Xavier there are significant negative abnormal returns for the pre-announcement period. On the announcement day the AAR is -0. 82% is observed. There is no significant difference observed in the financial and non-financial sectors. The results provide stronger evidence of semi-strong market efficiency of the Colombo Stock Exchange. Tools used Standard event study methodology of Brown and Warner is employed to find the results. 4. Signalling via stock splits: evidence from short interest fabricio perez, andriy shkilko,* and tony tang Objective We seek to confirm the split signalling hypothesis by studying sophisticated investors’ reaction to stock split announcements. Return-based tests of signalling used in earlier studies produce conflicting results and have been recently criticized as unreliable Tools used Return-based tests of signaling used Conclusion In this study, we test the split signaling hypothesis of Brennan and Copeland (1988) from a new angle that avoids relying solely on return measurement.
In particular, we focus on the postsplit actions of sophisticated investors, short sellers, and ask whether their behavior is consistent with receiving a positive value-relevant signal from a split and with trusting this signal 35. Seven Sins of Fund Management, a Behavioral Critique. By DrKW Macro research, 2005. This report brings out a critical analysis of investor behaviors, including some common errors of judgment. It is a collection of notes that aims at unearthing some of the more obvious behavioral weaknesses inherent in the ‘average’ investment process, and how avarice induced overtrading decisions cause contrary results. 6. The Impact of Stock Splits on Price and Liquidity on the Stock Exchange of Thailand by Pantisa Pavabutr Objective This paper explores the impact of stock splits on stock price and various aspects of liquidity using daily and intraday data from the Stock Exchange of Thailand between 2002-2004. Tools used Regression Conclusion This paper finds evidence that stock splits can have favourable impact on stock price through reduction of trade frictions such as bid-ask spreads and price impact measures.
The reduction in bid-ask spread and price impact is a consequence of increased trading frequency of market participants who are expected to have a preferred trading range. The study finds that stock splits that are effective in reducing trade friction are those that bring the post-split market price down to the range where market liquidity concentration is highest. Our paper provide support for the trading range hypothesis of stock splits and for firms in splitting stocks to cater to their clientele’s preferred trading range 37.
Measuring abnormal performance in event studies: an application with bonus issue announcements in Colombo stock exchange (cse) by Fernando K. G. K and Guneratne P. S. M Objective This paper examines the stock price performance on and around bonus issue announcements in CSE over the period 1991 to 2007 using alternative return generating models; market-adjusted model, mean-adjusted model and risk-adjusted model with the intention of providing a methodological triangulation in the context of event studies. Tools Used Parametric student T-Tests
Conclusion The positive AARs and CAARs observed over 51 days of investigation period on and around the bonus issue announcement indicate that there is information value of bonus issue announcement to market. 38. The Market Reaction to stock split – Evidence from Germany by Christian Wulff(1999) Objective This paper investigates the market reaction to stock splits using a set of German firms. Tools used T-tests Conclusion This paper argues that legal restrictions strongly limit the ability of German companies to use a stock split for signaling.
Consistently, abnormal returns around the announcement day are much lower in Germany than in the U. S. Although a significant increase in liquidity can be found after the split cross-sectional tests do not lend any support to the hypothesis that price changes are positively related to liquidity changes. 39. A Study on the liquidity effects of stock splits in Indian stock Markets by Mihir Dash and Amaresh Gouda (2007) Objective The objective of the study is to analyze the overall impact of stock returns on returns. Tools used Mean Variance Conclusion
In this study the returns in the period prior to the announcement are compared with the returns after the execution of the split, in terms of mean returns and variance of returns. The results of the study indicate strong evidence for an increase in the liquidity of the stock after the split. 40. Can splits Create Market liquidity? Theory and Evidence by V. Ravi Anshuman and Avner Kalay(1994) Objective The object is to find out whether splits should follow a period of stock price increase and should have positive announcement effects. Tools used Signalling hypothesis Conclusion
This model predicts that Japanese firms should split less frequently than American firms due to a more rigid tick size regulation on the Tokyo stock Exchange. The evidence presented is consistent with this prediction. In the U. S. 56% of stock distributions can be classified as splits (i. e. , splits dividends larger than 20%) whereas in Japan splits constitute only 6. 2% of the sample of stock distributions. 41. An Event Study of Reverse Stock Splits in Hong Kong Market by lihua Jing Objective The objective of this study is to examine the market reaction to reverse stock split in Hong Kong market.
Tools used I use event date methodology to examine the market reaction to reverse stock splits in Hong Kong market from 1991 to 2001. Conclusion This result partially suggests that the reverse stock improve the liquidity of the stock. The majority of the reverse-splitting firms do not change their board lot size after splits, they therefore reduce transacting costs. The relative tick sizes, which also affect the transaction cost, decrease significantly after splitting. My analysis of the cross-sectional distribution of the split factor provides no support for the “optimal stock price range” hypothesis.
Hence the, reverse stock split can be viewed as a passive stock to a decayed firm performance rather than an active means to achieve a specific objective. 42. An Empirical Note on US Stock Split Announcements, 2000-2009 by Xiaoqi Lia, Philip Storkb and Liping Zoua Objective This article analyses the market reaction to stock splits announcements, using a unique US sample over the period 2000 to 2009. Our event study finds a significantly positive Cumulative Average Abnormal Return (CAAR) around the announcement date. Tools used Factiva Analysis Conclusion
Event study methodology is used here to analyse a unique data sample of 120 US stock split This study showed the existence of positive abnormal returns around stock split announcements days. Evidently, in spite of the fact that capital markets have increasingly become deeper, more liquid and more efficient, these announcement effects still persist. Cross-sectional regressions also helped to analyse potential explanations for the presence of abnormal return 43. Surprise vs anticipated information announcements: Are prices affected differently? An investigation in the context of stock splits* Soosung Hwang, Aneel Keswani and Mark B.
Shackleton April 2007 Objective Its objective is to compare long run reaction to anticipated and surprise information announcements using stock splits. There may be under reaction in both cases, anticipated splits are treated differently to those that are unforeseen. Tools used Robustness tests Conclusion The conclusion of this study is that the after both types of stock splits, the split announcement is slowly absorbed into prices and this takes a number of months. More importantly, however, we find that there is indeed a difference between long run performance after anticipated and unanticipated stock splits.
There is not enough credibility in surprise split announcements; market participants are hesitant for firms that signal this way to revise their expectations of future performance upwards. The implications of this are that investors choose to invest cautiously in unforecast realized splits and more heavily in those splits that are forecast. This is the reason why the upward drift in prices following unanticipated splits is less pronounced. 44. The Market Reaction to Stock Split Announcements: Tests of Information, Liquidity, and Catering Hypotheses by Alon Kalay and Mathias Kronlund in 2010 Objective
The objective of this study is to examine analyst forecasts revisions around stock split announcements, controlling for potentially confounding news, and find that analysts revise earnings forecasts upwards by 2–3% around split announcements. Tools used T-tests Conclusion The studyfound out that the firms experience less mean reversion in earnings growth than matched firms; this earnings growth process is consistent with the hypothesis that analysts update their beliefs about the persistence of splitting firms’ past earnings growth following the announcement.
The analyst revision and abnormal returns are larger for firms for which there is otherwise less information, as measured by fewer analysts. They got evidence on splitting activity and the market reaction to split announcements that is inconsistent with liquidity-based theories and mixed with respect to catering. 45. The Market Reaction to Stock Splits – Evidence from India by Asim Mishra (2007) Objective This paper examines the market effect of stock splits on stock price, return, volatility, and trading volume around the split ex-dates for a sample of stock splits undertaken in the Indian stockmarket. Tools used Signaling hypothesis
Conclusion Evidence confirms a negative effect on price and return of stock splits. The overall cumulative abnormal returns after the split are negative. These results suggest that stock splits have induced the market to revise its optimistic valuation about future firm performance, rejecting signaling hypothesis to which splits convey positive information to markets. Hence, stock splits have reduced the wealth of the shareholders. The results also show that presence of a positive effect on volatility and trading volume following the split events, thus suggesting that split events enhance liquidity. CHAPTER-3 RESEARCH METHODOLOGY
Research Design The research used here is quantitative research as it evaluates the reaction of the market price of shares before and after the announcement of bonus issue. For this the price of various shares over a period of ten years is taken into consideration. The result we arrive will also be in quantitative terms hence it is a quantitative research. Sampling method The sampling technique used here is convenience sampling. The period of study is from 2000 to 2010. The sample size is finite as this study takes into consideration only those companies which are subject to bonus issue and stock split in pharmaceutical industry.
Variables of the study The variables used in this study are; Abnormal Return: Abnormal Returns means the return to a portfolio in excess of the return to a market portfolio. They can be negative also. Average Abnormal Return (AAR): Daily AAR has been calculated by averaging the AR of the sample companies for each days of the event window. CAAR: Cumulative Average Abnormal Returns has been calculated by cumulating the daily AAR for the entire event window Stock’s closing price: The closing price of sample pharma companies stock has taken from Prowess database for the entire event window i. e. -20 day to t+20 day. We have taken the adjusted closing price. To build the market model we have also taken adjusted closing price 30days prior to event window start date i. e. t-20. Nifty Closing Index: Nifty closing index value has also been taken for the event window as well as to build the market model. HYPOTHESIS Hypothesis 1 Null hypothesis- There is no significant change in the stock returns after the announcement of the bonus shares in pharma industry. Alternative hypothesis- There is significant change in the stock return after the announcement of bonus shares in pharmaceutical industry. Hypothesis 2
Null hypothesis- There is no change in the stock return after the announcement of the stock split in pharma stocks. Alternative hypothesis- There is significant change in the stock return after the announcement of stock split. Data Data about the stock price is collected from NSE website. The event date is defined as the announcement date of the board meeting considering stock splits or bonus issues. The event date is collected from Prowess Database. Estimation Procedure1 The purpose of our study is to determine whether there is any abnormal return around the event dates and how fast the new information is absorbed in the security prices.
For the purpose of the study, we constructed a null hypothesis (H0) as follows: There is no significant Average Abnormal Return (AAR) around the event dates, i. e. 1/n? AR = 0 Where n is the number of sample companies. We focus on the abnormal returns of our sample in the period over 20 days prior and 20 days after the event date. Brown and Warner (1980) reported that ‘a simple methodology based on the market model is well-specified and relatively powerful under a wide variety of conditions. ’ Following Brown and Warner, we employ the market model to compute the abnormal returns that are derived from the following equation: Rj,t = ? + ? jRmt + ? jt Where, Rj,t = the daily return security j at day t Rmt = the daily return on Indian stock market at day t ?j , ? j = OLS intercept and slope coefficient estimators, respectively ? jt = the error term for security j at day t We use the Nifty index as a proxy for computing market return. To compute daily market return, we use logarithm of daily return to avoid serial correlation. Rmt = Log (It/It-1) The daily return for security j is: Rjt = Log (Rt/Rt-1) ?j , ? j are derived from the market model over one year prior to the event month.
The expected returns for security j at day t are defined as, ERjt = ? j + ? jRmt Where ? j, ? j are OLS estimators of (? j , ? j). We measure the daily abnormal return as ARjt = Rjt – ERjt. For each event date t, the cross sectional average abnormal returns for all firms are defined as: n AARt = 1/n? ?jt J=1 t = -20 to +20 n = 10 for bonus issues & n = 8 for stock splits To analyse the price effects, we compute the Cumulative Average Abnormal Returns (CAAR) for the 41 days centered in the announcement dates. The use of CAAR is a common methodology.
CAAR for event days t1 to t2 were obtained as follows: t2 CAAR = ? AARt t=t1 Limitations of the study * The study takes into account only those companies which belong to pharmaceutical sector. * The event window has been constructed for t-20 day to t+20 day. * It takes into account only those companies which are listed in NSE. BIBLIOGRAPHY 1. Dr. A. K. Mishra, Associate Professor, Indian Institute of Management, (2005) “An empirical analysis of market reaction around the bonus issues in India” 2. Ms. Madhuri Malhotra, Dr. M. Thenmozhi & Dr.
G. Arun Kumar (2007); “Stock market reaction and liquidity changes around bonus issue announcement: Evidence from India” 3. Jijo Lukose P. J. ( December 2002); “Does bonus issue signal superior profitability? A study of the BSE Listed Firms” 4. M. Raja, Bharathidasan University College “An empirical test of Indian stock market efficiency in respect of bonus announcement “ 5. Rao, K Chandra Sekhara and Geetha, T (1996), Indian Capital Market: Informational Signaling and Efficiency, New Delhi:A. P. H. Publishing Corporation. 6.
Abhijeet Chandra; “Decision-making in the stock market: incorporating psychology with finance” WEB PAGES: http://www. stockmarketguide. org/bonusshares. asp http://www. citeman. com/3353-bonus-issues-and-sock-splits-and-buybacks/ http://www. citehr. com/research. php? q=salary-splits http://www. thehindubusinessline. in/iw/2007/02/04/stories/2007020401441300. htm http://www. vikalpa. com/pdf/articles/2008/vol333-03-35-47. pdf http://ssrn. com ——————————————– [ 1 ]. Market Reaction Around the Stock Splits and Bonus Issues: Some Indian Evidence by Dr. Satyajith Dhar, University of Kalyani.
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