Effect of Stock Splits on Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Most investors strongly believe that a stock split is an indication of a company’s success. The neo-classical financial theory however argues that splits are nothing but mere numeracies changes that shouldn’t affect the firm’s market value. Financial economic studies have for long tried to address this contradiction and empirical regularities linked to stock splits have been discovered. Splits are specifically linked to variations in the return, risk, return, liquidity and volume attributes of the stock. This study sought to determine the effect of stock splits on stock returns of firms listed at the Nairobi Securities Exchange. The study analyzed the reaction of stock returns of 14 listed firms 30 days before stock split and 30 days after the stock split. The 14 firms are the ones that had split their stocks between the year 2004 and 2016. The study discussed the abnormality of the stock returns and the cumulative abnormality. The study found out that only Equity Bank Ltd, Kenya Power & Lighting Company Ltd, Athi River Mining Cement, Carbacid Investments Ltd and East African Breweries Ltd recorded positive average abnormal returns. All the other 9 firms reacted negatively to stock split over the 61 day event window. However, none of the abnormalities (positive or negative) was found out to be statistically significant as was evidenced by the t-test values. The reaction of the stocks to stock split was very fast which implies that the Nairobi Securities Exchange is efficient. The abnormality was mostly noted 1 day before the stock split to 1 day after the split. The study concludes that stock split has a cumulative negative effect on stock returns of firms listed at the Nairobi Securities Exchange. The study also concludes that 64.29% of the firms listed at the Nairobi Securities Exchange react negatively to stock split while 35.71% react positively. The study also concluded that this reaction is not statistically significant. The quick reaction to the stock split indicated that the Nairobi Securities Exchange was efficient. Presence of abnormal reaction to stock split though not statistically significant was attributed to speculative trading at the Nairobi Securities Exchange. This indicates a need for investor education as a way of reducing speculative trading which results to abnormal reaction. The capital Markets Authority should implement policies, rules, regulations and trading guidelines to monitor the trading activities of the Nairobi Securities Exchange as this will make the market efficient and reduce abnormalities that make the investors gain or lose unfairly.