The Long Term Performance of the Common Stock After Stock Split for Firms Listed at the Nairobi Stock Exchange

Abstract

The objective of the study was to measure the post split performance of eleven stock splitting firms as well as those who announced large stock dividend from 1st January 2000 to 31st December 2005. This also included an investigation to determine if the market allows the investor to capture abnormal returns after a stock split announcement. The study methodology involved obtaining the buy-and-hold abnormal return for the splitting stock against the benchmark (control) portfolio with bootstrapping. Benchmark portfolios were formed from firms of the same size reference portfolio. Based on the evidence in this study, it can be concluded that stock split are not followed by abnormally positive returns, and that investors have not systematically under reacted to stock split announcement. The results of the study suggest that the stock market overreacted to the information conveyed in the stock split announcements. After controlling for the potential effects of firm size, eleven (11) stock splitting firms, on average, earn significant abnormal return of - 1.49% for the 1- year period after the announcement month. The abnormal returns for the 2- and 3- year periods after the announcement month are -5.27% and -6.55% respectively.