The Effects of Rights Issue on Shareholder Wealth Atthe Nairobi Securities Exchange

Abstract

Firms opt to raise additional funds from rights issue so that they have an optimal capital structure, avoid breaching debt covenants and enhance the long-term liquidity of the business. This research sought to establish the effects of rights issue on shareholder wealth of firms listed at the NSE. The study focused on the firm size, dividends and leverage as determinants of shareholder wealth. The focus of the study was between 2008 and 2020 when most companies issued rights at the NSE. This study is an event study which uses a descriptive research design. The objective of the study was to establish the effects of rights issue on shareholders’ wealth for NSE listed firms. Different researchers across the globe have found mixed results and hence it was essential to focus on the firms listed at NSE as it was majorly an unexplored research area and also to update with recent data. From the 65 firms listed at the NSE during 2008-2020 there were 12 firms that issued rights. The study sourced data from secondary sources mainly mid-year or end year financial reports published at the CMA, NSE, and the firm websites. From the model developed, data was collected at intervals of 2- year prior and 4-year post rights issue. Shareholder wealth was determined as a function of firm size, leverage and dividends. Statistical analysis was done to determine how the independent and dependant variables behave when there is a unit change in one element. Using the market value added ratios the study found that the mean MVA reduced with rights issue from 19.48417 to 18.8634. From the regression analysis, fixed effects model showed an R squared value (within) of 0.6750 in the pre-issue period and 0.7199 for the post-issue period. This indicated that rights issue strengthened the effect of determinants of shareholder’s wealth among listed firms in Kenya. This indicated that firm size, leverage and dividends as determinants of shareholder wealth contributed largely to the changes in MVA of listed firms that issued rights.The study infers that rights issue has a negative effect on shareholder wealth on NSE listed firms. The study recommends that listed firms in Kenya to raise capital from other sources. Further research is recommended on other factors influencing shareholder’s wealth other than rights issue; different time period like 5 years; other measures like economic value added as measure of shareholders’ wealth; and use of a different methodology in either bull or bear market conditions.