The effect of stock splits and large stock Dividend on liquidity: evidence from the Nairobi stock exchange
Abstract
Since 1969, researchers have been bewildered with stock split, the pioneer study of Fama,
Fisher, Jensen, and Ross, which tried to explain the reasons behind the noticeable increase in
share prices before and after the announcement of the split. The study intended to find out
whether or not stock splits have any effect on the liquidity of stocks. Specifically what
motivates managers to engage in stock splits and to see if there was a change in liquidity
before and after the splits.
This was a descriptive research design study, aimed at establishing the effect of stock splits
and stock distribution on the liquidity of a share. The sample was drawn from a population of
48 companies listed at the Nairobi Stock exchange. The individual companies were sampled
through cluster sampling technique due to qualities each company in the sample had, they
had either had a stock split or declared a bonus issue of25% and above. Data from secondary
sources was used to compute the measure of Liquidity, which was proxy, by Trading Activity
ratio.
The data collected from the Nairobi Stock exchange, was edited, coded, transformed and
entered into various data analysis tools ready for analyses by use of excel and SPSS
computer packages. Data was analyzed and presented in form of frequency tables, and charts.
The study found out that in the case of splits, most managers in Kenya opt for stock splits to
40
maintain an optimal trading range. The two split at the Nairobi Stock Exchange, namely; East
African Breweries Limited (EABL) and Kenya Oil C<nhpany (KENOL) had improved
activity after the split compared to before the stock split. The Stock distributions (Bonus
issues) had varied results; this can be attributed to the cases like; Kenya Finance bank, which
in 1994 and 1995 declared a stock dividend and put was under receivership a few months
after the 1995 stock dividend declaration. The Unga Group in 1998 distributed stock
dividend at the rate of one for every five held and yet the company incurred huge losses that
year (Mbugua, 2004). The Kenyan investors seem to associate bonus issues with bad news,
leading to the decline in liquidity of stocks, in the case stock dividends.
Sponsorhip
The University of NairobiPublisher
School of Business ( SOB )
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