The Effect Of Stock Split Announcements On Share Prices Of Companies Listed At The Nairobi Securities Exchange

Abstract

Corporate announcements have many effects on the stock markets and this has made the study of stock price movements an area that has attracted a lot of attention from various researchers. All over the world, it is now a requirement from the capital market regulators that any publicly quoted company intending to make any corporate announcement must write to the respective stock exchanges where their shares are traded. This study contributes towards understanding the behaviour of share prices in relation to stock split announcements for companies listed at the Nairobi securities market in Kenya. An event study methodology was used in this study to determine the impact and price reactions of all the companies that split their shares between January 2004 and December 2015 in the period surrounding sixty days of the announcement dates. Abnormal returns were calculated and t-tests were conducted to examine the significance. Empirical results show that the average abnormal returns are statistically significant at 5% on the event (announcement) date. The shareholders are able to earn a positive AAR of 6.9% on the split announcement day. The study also found significant reaction on the announcement date as the information on the split was absorbed by the market which is an indicator of information efficiency. However, the post-split announcement event window is characterized by negative abnormal returns which ended up wiping out the cumulative average abnormal returns of 14.4% witnessed in the pre-announcement period to the event day to a mere 0.04% at the end of the event window. Overall, it can be argued that the investor eventually suffers negative abnormal returns in post-split announcement period. The study recommends that the Capital Markets Authority should review the policy on stock splits with a view to encouraging more companies to split their shares. The CMA should also enforce rules against insider trading through effective monitoring to safeguard the integrity of the operations at Nairobi Securities Exchange. To eliminate the abnormal returns associated with speculative retail trading, the CMA should educate the investing public on the operations of the Nairobi Securities Exchange. This will ultimately boost investor confidence through equal access to market information.