The Effect of Stock Splits on Stock Returns of Firms Listed at Nairobi Securities Exchange
Abstract
Stock split is an action by which a company lowers the face value of its stocks,
simultaneously increasing the number of outstanding shares, but keeping the
company's total capital base intact. Over the years the relationship between stock
splits and stock returns has been a subject of continuing interest to economists and
practitioners. The objective of this study is to determine the effect of stock splits on
stock returns of firms listed at the Nairobi Securities Exchange. An event study
research design was used. This study focused on 14 firms that have spilt their stocks
between the years 2004 and 2014. However, the study managed to collect secondary
data from seven (7) firms out of 14 firms that had split their stocks in the study period
(2004-2014). This represents a response rate of 50% which was considered reliable
for making generalizations of the whole population. The event window consisted of
61 days. Share price index for 30 day pre and 30 day post-split announcement date
was used. The study found that stock-splits impacts positively on stock returns, the
findings observed that four companies reacted positively to stock splits in the event
period. The study recommends that since stock split is a new phenomenon in the
Kenyan market, capital markets authority should encourage listed firms to split their
stocks to boost their stock returns. The study also recommends that local and
international investors should be educated about trading at NSE in an attempt to
encourage long-term investments other than short-term. This will help firms to
minimize abnormal reaction of prices caused by speculative trading by retail
investors. Future researchers interested in this field of study should consider covering
a longer event period to establish whether they will get similar results.
Publisher
University of Nairobi