MARKET REACTION TO STOCK SPLITS: AN EMPIRICAL EVIDENCE FROM THE NAIROBI STOCK EXCHANGE

This paper examines the effect of stock splits at the Nairobi Stock Exchange. This is achieved by studying nine companies that have undergone stock splits in the period 2002 to 2008. The study makes use of the trading activity ratio to determine whether stock splits elicit any reaction in the Kenyan market. The study makes use of daily adjusted prices for sample stock for the event window of 101 days, consisting of 50 days before and 50 days after the stock split.  The event study methodology is employed in the determination of the effects of the split. Abnormal returns are calculated by use of the market model and t-tests are conducted to test the significance.

 

The study finds that the Kenyan market reacts positively to stock splits, shown by a general increase in volumes of shares traded around the stock split. There is also an increase in trading activity after the stock split as compared to that before the stock split. This is consistent with the signaling hypothesis, which states that managers of companies split their stock to act as a means of passing information to stock holders and potential investors. The study finds that on the split date and on days around the stock split, there was a positive average abnormal return that was very significant at 0.05% significance level. Results of the cumulative abnormal return indicate that there is a positive cumulative abnormal return across the different event windows.

 

http://erepository.uonbi.ac.ke:8080/xmlui/handle/123456789/10052

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