The Effect of Rights Issue on Stock Prices of Firms Listed at East Africa Srcurities Exchanges

Abstract

Firms in stock markets engage in rights issue as an option to generate more capital for financing their growth plans and internal undertakings (Ramirez, 2011). Corporations issue rights as an alternative of raising capital for expansion or for internal operations financing. Rights issues offer the current stockholders the opportunity of acquiring new stocks, usually offered at a price lower compared to the current market price to persuade participation. Companies cross list to attract more investors, reduce cost of capital and generally increase liquidity of stock. The study was established to examine rights issue’s effect of on stock prices of listed firms at East Africa Securities Exchanges. The study adopted a descriptive research design targeting firms listed on East Africa Securities Exchange. Data used for the study was mainly secondary and was gathered using a data collection sheet. The analysis was done using event study methodology. Findings of the study revealed that rights issue announcement affects share prices of the firms listed on East Africa Securities Exchange. This study concludes that stock prices of the listed firms on EASE are sensitive to rights issue, the share prices of the listed companies are initially insensitive to right issue announcements some few days to the announcement and then the share prices highly become sensitive towards the announcement dates. The study recommends that all fund managers operating in East Africa should make their decisions based on the rights issue announcement dates on behalf of their clients. Regular monitoring of the performance of the listed firms and their announcements should further be in place among fund managers so as to make rational investment decisions on behalf of their clients, that top management of the listed firms on EASE should use rights issue to manipulate their share prices. Hence, their value at the market place and that both individual as well as institutional investors operating on the EASE should make rational and informed decisions based on the rights issue announcements of the listed firms. This will help them to enhance their capital gains.