The effects of share splits on long run stock returns for companies listed at the Nairobi securities exchange

Abstract

Share splits are a common corporate event among listed companies. Though it is commonly practiced it has been described as a mere accounting change that increases the number of shares outstanding without any benefit to the shareholders. This study sought to determine the effects of share splits on long run stock returns among listed companies at the Nairobi securities Exchange. The study covered returns for twenty four months after the company had undergone a share split. The study therefore sampled firms that had been in operation for at least twenty four months after they had undergone a share split. There were eleven firms listed at the NSE that fulfilled this condition and were therefore sampled for this study. The study used the long run study methodology and applied the buy and hold benchmark approach. The method required the identification of the event firm and its benchmark firm and comparing the returns achieved by each of these firms correspondingly for the same month. Secondary data obtained from the Nairobi Securities Exchange was used in this study. The data consisted of monthly opening and closing share prices of each of the sampled firms together with those of its identified benchmark firm for the entire twenty four months of the study. The study method required the determination of each of the sampled event firm's monthly buy and hold returns and comparing these returns with those of its benchmark firm, which acted as a proxy for the market. The benchmark firm was identified as another firm which had not undergone a share split and was within 70% to 130% of the share capital of the event firm at the time of the event firm's share split, and has a book to market equity (BE/ME) ratio that is closest to that of the event firm. The monthly returns of the event firm are then compared with those of its benchmark firm. The difference in the monthly returns achieved by the paired firms constitutes the buy and hold abnormal return (BHAR) for the event firm. The buy and hold abnormal returns for each firm were then tested for difference from zero at 5% significance level in order to determine whether there is any difference between the returns of the event firm and the returns of its benchmark firm. The study found that among all the eleven firms sampled; only two firms achieved a positive mean buy and hold abnormal return of 1.89% and 3.72% respectively. The other nine firms representing 82% of the sampled firms achieved a mean negative buy and hold abnormal returns ranging from -4.94 % to -0.14 %. These returns were however found to be insignificant at 95% confidence level. This implies that there was no significant difference between the returns achieved by the event firm and the returns achieved by its benchmark firm for the period under study. The study therefore concluded that share splits at the Nairobi securities exchange have insignificant effects on stock returns for the first two years following a share split. However further studies on its effects on periods longer than two years would be recommended in order to develop a hypothesis. The criteria for the choice of the benchmark firm would also need to include a consideration of the industry in which the event firm is operating in order to allow for proper benchmarking of the paired firms returns. Firms from the same industry would be affected by market conditions in the same way.