An empirical investigation of the information content of bonus share announcements for companies quoted at the Nairobi Stock Exchange
There is a theory that bonus shares can signal management's view of the condition of a firm and that firm managers use bonus shares announcement to signal a firm's quality. The information content of events and its dissemination determine the security prices in the capital market. This study was to test the semi-strong form of market efficiency on the Kenyan Capital Market. The goal was to prove that the Kenyan capital market is at least semi-strong, that is, public information is immediately built into share prices In the developed countries including Kenya, many research studies have been conducted to test the information content of dividends. However, in Kenya no study has been conducted to test the information content of bonus shares announcement. Therefore, the purpose of this paper was investigates to information content of bonus issue announcements by companies quoted at the Nairobi Stock Exchange. This study was an event study, evaluative research design was used. All the 54 active companies trading shares at the Nairobi Stock Exchange were targeted. The period of study was financial year January 2000 and September 2010. For testing purposes, the event period consists of 30 trading days (days -15 .... , 0 announcement day, +15) around each dividend announcement date. Analysis of Average Stock Returns Variability (ASRV) and Abnormal Returns (AAR) were used. ASRV analysis is used if announcement contained information relevant for valuation companies' stocks and the announcement effect exists only if abnormal returns are significant. The study employed student t to test for the equality of the event period and comparisons mean returns before and after dividend announcement. The study empirically examined the information content of corporate event of stocks with regard to 38 bonus issue announcements released by the 26 companies over the period January 2000 and September 2010. The results of the study showed that the stock prices reacted to the announcement of bonus issue. Therefore, it can be concluded that bonus announcement contained information useful for valuing the stocks. Thus information of bonus announcement can be used by the investors for making abnormal returns at any point of the announcement period, through the strategy of short selling. Further, the results show that market positively received the bonus announcement information before the announcement came up. However, the analysis depicts the fact that the market gained significant reactions in the stock prices during the pre and post announcement periods. Thus one can conclude from the foregoing discussions that the capital markets in general are not perfectly efficient, to the announcement of bonus issue. This informational inefficiency can be used by the investors for making abnormal returns at any point of the announcement . period. The study recommended that stock market may use that information to revise the prices of securities and the investors are advised that when the company comes up with the bonus issue, the investor should take immediate investment decision (buy or sell) in order to benefit from the bonus issue announcement.