The Relationship Between Bonus Issues Ratio and Market Reaction Among Companies Listed in the Nairobi Securities Exchange

Abstract

The objective of this study was to assess the relationship between Market Reaction and Bonus Issue Ratio. The period of study cover d 2001 and 2011. This was a good study period as the Kenyan economy registered tremendous growth with over the same period. In order to operationalize the study Methodology was adopted. The population of the study was drawn from the 54 companies listed in the NSE. Out of these listed companies, 30 companies had issued bonus shares over the study period. It is these 30 companies which were studied. The two variables under study were Market Reaction and Bonus Issue Ratio. Market reaction was measured using The Security Returns Variability Model (SRV Model). Computation of abnormal returns around the bonus announcement period was required in applying the SRV Model. Abnormal returns were computed as the difference between Actual security returns and the market return as proxied by the weighted average Index of the 54 companies listed in the NSE. Bonus issue Ratio was computed as the ratio of the bonus shares issued against each share held. Regression analysis was then used to evaluate the relationship between Market Reaction and Bonus Issue Ratio. This study confirmed that there is information content conveyed to the market in a bonus issue and that the BIR is important in the announcement. The research study revealed that there is a positive relationship between Market Reaction and Bonus issue Ratio. The relationship however is not strong with only 8.4% of the Market Reaction being explained by the BIR.