Abstract: Maximizing shareholders wealth has been a driving force for all corporate actions including stock splits. There have been numerous empirical studies covering diverse aspects of a stock split. The splitting company’s stock price has been seen to react differently through the stages of the split life-cycle, starting from the event announcement date to the record date, and even beyond. While some researchers believe that stock split announcements are a signal of the management’s optimism about the company’s future earnings, others argue that the firms use the positive reaction to the split announcement to raise more funds at a higher price after the split. Yet others believe that a split is meant to boost liquidity. The objective of this study was to investigate the effect of stock split on stock prices for firms listed at the Nairobi Securities Exchange. Companies that split their stock between the year 2006 and 2015 will be studied to establish whether there were any abnormal returns recorded within the event window and calculate the magnitude of the returns. The event study methodology was used to examine the behavior of firms' stock prices around the stock split. Abnormal returns within the event will be measured. objectives of the study were to establish the behavior of securities returns around time of stock split and to establish the relationship between stock split and securities’ returns at the Nairobi Stock Exchange. To achieve these objectives the event study methodology of the single-index market model was used to regress the stock returns and the market returns (NSE 20 index) during the estimation period to get the constants determined by simple regression using daily data for up to 120 days before the 21 days test period. A return of firm which did not announce stock split but whose P/E ratio was equal or close to the sample firm was used as a benchmark for abnormal return computation. The abnormal returns were calculated as the difference between the return of the sample firm and that of the matching control firm over the test period. The abnormal returns were aggregated by averaging them across firms and cumulating them over the test period.
Keywords: Splitting Company’s Stock Price, Split Life-Cycle.
Title: Relationship between Returns on Classified Split Securities and Market Portfolio in Nairobi Securities Exchange
Author: Otip Mary Akoth, Dr. Jane Omwenga
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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