Stock splits announcements in Kenya: a test of stock market efficiency

Abstract

A central issue in the analysis of markets is the degree to which they are efficient and investors care about market efficiency because stock price movement affects their wealth and are motivated to save and invest in the capital market only if their securities in the market are appropriately priced. Market inefficiency may thus affect consumption and investment spending which in tum influences the overall performance of the economy. This study sought to test the Nairobi stock exchange efficiency in the semi-strong form by assessing the stock market reaction to stock split announcement.

The study used an event study methodology to examine the market reaction to stock splits announcements through share price performance on the 11 companies that had conducted stock splits. The study used secondary data collected from NSE on the daily stock prices of the companies that had conducted stock splits and the NSE 20-Share market index for 30 day pre and post-split announcement. The study used Market Model (MM) to analyze the abnormal returns and price variability of the shares of the companies that announced the stock splits.

The study found that stock prices of the companies that had conducted splits had low or negligible abnormal returns following split announcement especially from the second day to the tenth day while the period prior to the announcement had high abnormal returns. The study concluded that though the stock market is efficient in the semi-strong form, it is not perfectly efficient. The study recommend that the CMA to put into place stringent measures to curb the possibility of insider trading owing to high abnormal returns prior to stock splits