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The Effects of Share Splits on Long Run Stock Returns Among Listed Companies at the Nairobi Securities Exchange

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The Effects of Share Splits on Long Run Stock Returns Among Listed Companies at the Nairobi Securities Exchange THE EFFECTS OF SHARE SPLITS ON LONG RUN STOCK RETURNS FOR COMPANIES LISTED AT THE NAIROBI SECURITIES EXCHANGE BY STEPHEN K. NDEGWA A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION, UNIVERSITY OF NAIROBI OCTOBER 2013 i DECLARATION This Research project is my original work and has not been presented for a degree in any other University or institution. No part of this project may be reproduced without the prior written permission of the author and/ or University of Nairobi. Signed--------------------------------------------- Date-------------------------------- Stephen K. Ndegwa D61/75332/2012 This project has been submitted for examination with my approval as the University supervisor Signed--------------------------------------- Date---------------------------------- Dr. Josiah Aduda Chairman Department of Finance and Accounting School of business, University of Nairobi ii ACKNOWLEDGEMENT I am most grateful to the Almighty God for the gift of life, health, ability and strength that has enabled me to complete this project. I shall forever worship and praise your holy name. My gratitude goes to my supervisor, Dr. Aduda for his guidance and supervision that has enabled me to complete this project successfully. I also acknowledge the other lecturers in the School of business whom I consulted on various issues during the course of the project. I particularly acknowledge Mr. Mirie Mwangi. I also wish to thank the Nairobi securities Exchange staff who supported me by providing the data that I needed to complete this project. I also thank my family who supported me all through. May God Bless you all. iii DEDICATION This work is dedicated to my late Father, Eliud Ndegwa for instilling in me the importance of Education from a very tender age. May the Almighty God Rest his soul in eternal Peace. iv ABSTRACT Share splits are a common corporate event among listed companies. Though it is commonly practiced it has been described as a mere accounting change that increases the number of shares outstanding without any benefit to the shareholders. This study sought to determine the effects of share splits on long run stock returns among listed companies at the Nairobi securities Exchange. The study covered returns for twenty four months after the company had undergone a share split. The study therefore sampled firms that had been in operation for at least twenty four months after they had undergone a share split. There were eleven firms listed at the NSE that fulfilled this condition and were therefore sampled for this study. The study used the long run study methodology and applied the buy and hold benchmark approach. The method required the identification of the event firm and its benchmark firm and comparing the returns achieved by each of these firms correspondingly for the same month. Secondary data obtained from the Nairobi Securities Exchange was used in this study. The data consisted of monthly opening and closing share prices of each of the sampled firms together with those of its identified benchmark firm for the entire twenty four months of the study. The study method required the determination of each of the sampled event firm’s monthly buy and hold returns and comparing these returns with those of its benchmark firm, which acted as a proxy for the market. The benchmark firm was identified as another firm which had not undergone a share split and was within 70% to 130% of the share capital of the event firm at the time of the event firm’s share split, and has a book to market equity (BE/ME) ratio that is closest to that of the event firm. The monthly returns of the event firm are then compared with those of its benchmark firm. The difference in the monthly returns achieved by the paired firms constitutes the buy and hold abnormal return (BHAR) for the event firm. The buy and hold abnormal returns for each firm were then tested for difference from zero at 5% significance level in order to determine whether there is any difference between the returns of the event firm and the returns of its benchmark firm. The study found that among all the eleven firms sampled; only two firms achieved a positive mean buy and hold abnormal return of 1.89% and 3.72% respectively. The other nine firms representing 82% of the sampled firms achieved a mean negative buy and hold abnormal returns ranging from -4.94 % to -0.14 %. These returns were however found to be insignificant at 95% confidence level. This implies that there was no significant difference between the returns achieved by the event firm and the returns achieved by its benchmark firm for the period under study. The study therefore concluded that share splits at the Nairobi securities exchange have insignificant effects on stock returns for the first two years following a share split. However further studies on its effects on periods longer than two years would be recommended in order to develop a hypothesis. The criteria for the choice of the benchmark firm would also need to include a consideration of the industry in which the event firm is operating in order to allow for proper benchmarking of the paired firms returns. Firms from the same industry would be affected by market conditions in the same way. v TABLE OF CONTENTS DECLARATION.......................................................................................................... ii ACKNOWLEDGEMENT ..........................................................................................iii DEDICATION............................................................................................................. iv ABSTRACT .................................................................................................................. v LIST OF TABLES ...................................................................................................... xi ABBREVIATIONS ................................................................................................... xiv CHAPTER ONE .......................................................................................................... 1 INTRODUCTION........................................................................................................ 1 1.1 Background to the Study .......................................................................................... 1 1.1.1Share splits ................................................................................................. 4 1.1.2Reverse splits ............................................................................................. 5 1.1.3Stock Returns ............................................................................................. 5 1.1.4Relationship between Share splits and Long run Stock Returns. .............. 7 1.1.5Nairobi securities Exchange ...................................................................... 9 1.1.6Stock splits in Kenya ............................................................................... 10 1.2Research Problem ................................................................................................... 11 1.3 Research Objective ................................................................................................ 12 1.4Value of the Study .................................................................................................. 13 1.4.1 Researchers ............................................................................................... 13 1.4.2 Investors .................................................................................................... 13 1.4.3 Government and its regulatory Agencies .................................................. 14 1.4.4 Financial practitioners and Advisors ........................................................ 14 CHAPTER TWO ....................................................................................................... 15 LITERATURE REVIEW ......................................................................................... 15 2.1Introduction ............................................................................................................. 15 2.2Efficient market hypothesis .................................................................................... 15 2.3Theories of stock splits ........................................................................................... 17 2.3.1Signaling theory ....................................................................................... 17 2.3.2 Liquidity hypothesis................................................................................ 18 2.3.3Neglected firm theory .............................................................................. 18 2.3.4Trading range theory ................................................................................ 19 vi 2.3.5Value Manipulation hypothesis ............................................................... 19 2.4 Review of Empirical Evidence .............................................................................. 20 2.4.1Empirical Evidence on effects of stock splits on Long run returns ......... 24 2.5 Share splits ............................................................................................................. 25 2.5.1Why firms split their shares ..................................................................... 25 2.5.2 Constraints to share Splits ....................................................................... 26 2.6 Stock prices. ..........................................................................................................
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