Electronic copy available at: http://ssrn.com/abstract=1087200

1

Market Reaction Around the Stock Splits and Bonus

Issues: Some Indian Evidence

By

Dr. Satyajit Dhar

Reader, Dept. of Business Administration,

University of Kalyani.

Ph: 9433463658(M)

Email: satyajitdhar@yahoo.co.in

&

Ms. Sweta Chhaochharia

Research Scholar

University of Kalyani

Ph: 9434139726 (M)

Email: sweta_ch04@yahoo.com

Electronic copy available at: http://ssrn.com/abstract=1087200

2

Abstract It is often argued that stock splits and bonus issues are purely cosmetic events. However, many studies have found numerous stock market effects associated with bonus issues and stock splits. This paper examines the effects of these two types of events for the Indian stock market. We use the event study methodologies. The abnormal returns are calculated using the Capital Asset Pricing Model and then t-tests are conducted to test the significance. Consistent with the existence literatures, the two events are associated with significantly positive announcement effect. For bonus issues, the abnormal returns were about 1.8% and for stock splits, it was about 0.8%. On a whole, the paper finds evidence of semi-strong form efficiency in the Indian stock market.

Market Reaction around the Stock Splits and Bonus Issues: Some

Indian Evidence

Stock splits and bonus issues (stock dividends) continue to generate interest as none of them

have any direct valuation implications. As such these events are sometimes described as

‘cosmetic’ events as they simply represent a change in the number of outstanding shares.

The reason for the interest is therefore to understand why managers would undertake such

(potentially costly) cosmetic decisions. Empirical research has shown that the market

generally react positively to the announcement of a stock split / bonus issue (Foster and

Vickrey (1978), Woolridge (1983), Grinblatt et al (1984), McNichols and Dravid (1990),

Masse et al (1997), Lijleblom (1989), Bar-Yosef and Brown (1977)). Numerous studies in

India have dealt with the information content of various types of announcements

(Ramachandran (1985), Obaidullah (1992), Rao (1994), Rao and Geetha (1996), Srinivasan

(2002), Budhraja I, Parekh P and Singh T (2004), and Mishra (2005)). However, no

contemporary study has investigated the comparative information content of the stock split

and stock dividend (bonus issue) announcements in Indian context. This deficiency provided

the primary impetus for this study.

The prime concern of this paper is to analyse the information impact of the announcement of

stock split and bonus issue for stocks listed on National Stock Exchange (NSE). The paper is

organized as follows. The next Section gives the conceptual and regulatory issues of stock

split and bonus issues in India. The 3rd Section presents a brief notion of Efficient Market

Hypothesis (EMH) and the possible price reaction to the announcement of stock split and

bonus issue in the light of EMH. The 4th Section presents the review of some relevant prior

3

studies. Section 5 describes the sample data and methodology employed in this paper. The

results of the study of the stock price behavior around the declaration days for stock splits

and bonus issues are presented in Section 6. The last Section contains a short discussion and

concluding remarks.

2. STOCK SPLITS AND BONUS ISSUES: CONCEPTUAL AND REGULATORY

ISSUES

Stock splits

A stock split simply involves a company altering the number of its shares outstanding and

proportionately adjusting the share price to compensate. The balance sheet items remain

same except that the total number of outstanding shares of the company increases

proportionately to the ratio of split. Split can occur at any ratio. The most commonly used

ratios are 2:1, 3:2, 5:4, 4:3 etc. After a two for one (2:1) split, each shareholder has twice as

many shares but each represents a claim on only half as much of the corporation’s assets and

earnings. Also they can happen in reverse, e.g. 10:1 which are called reverse split. The

announcement of a reverse split has been found to elicit a negative stock market response (

Wooldridge and Chamber, 1983). A notable difference between stock split and reverse split

is that, while regular splits may be ends in themselves as vehicles to correct stock

undervaluation, reverse splits do not aim at signaling the firm value but moving share prices

to a more attractive trading range. The information quality of reverse split is likely

inadvertent, and only a by-product of their original purpose (Nikos Vafeas, 2001). Reverse

split is not common among Indian companies.

In a stock split, the company announcing a stock split notifies the stock exchange, the record

date, after completing the legal and procedural formalities. The stock exchange accordingly

fixes the ex-dates, which generally comes few days earlier the record date. On the ex-date

and thereafter, the only market is in the post split shares.

Section 94(1)(d) of the Companies Act, 1956 allows every limited company to subdivide all

or any of its shares into shares of smaller amount than is fixed by the memorandum. The

4

Ministry of Finance, vide Circular No. 1/7/SE/81 dated January 22, 1983 had restricted to

change the face value at a denomination lower than Rs. 10 keeping them fixed at Rs. 10 or

Rs. 100. This concept of fixed par value was abolished by the SEBI vide Circular No.

SMDRP/ Policy/ Cir-16/ 99 dated June 14, 1999 that provided companies freedom to issue

shares in any denomination to be determined by them as long as it is not fractional by

amending their Memorandum and Articles of Associations. Thereafter, it was observed that

several companies were resorting to frequent splitting and consolidation within a short span

of time. To fill the existing loopholes, the Secondary Market Advisory Committee (SMAC)

has been set by SEBI as a standing committee to advice on maters related to secondary

market. The committee was reconstituted under the chairmanship of Dr. R.H. Patil. The

SMAC in its meeting held on October 9, 2003 discussed with many other things, the issue of

frequent changes in face value by listed companies. The SMAC deliberated on the aforesaid

issue and recommended that the provisions of the SEBI Circular No. SMDRP/Policy/Cir-16,

99 dated June 14, 1999, may be modified to include the following: -

(a) No listed company whose market price in the previous six months is less than Rs. 500 per

share can split the value of its equity share.

(b) If the company had gone in for split or consolidation, it would not be permitted to do it

again for a period of three years from the date of the last split/consolidation.

(c) The change in the par value (i.e. split or consolidation, as the case may be) will have to be

disseminated through the Websites of the stock exchanges and through EDIFAR for a

continuous period of one year, from the date of last split/ consolidation.

(d) This should be in addition to the condition stated in SEBI Circular dated June 14, 1999

referred above.

Recommendations of the Committee are no doubt, a welcome step for protecting the interest

of investors. But these are yet to be implemented.

Bonus issues

Bonus issues (equivalent to stock dividend in the US and scrip issues in the UK) are simply

distributions of additional stocks made to existing shareholders in proportion to their current

investment. A company can distribute bonus stocks out of retained earnings or accumulated

5

capital reserves. If a company distributes a bonus issue by using retained earnings, it makes

a book entry to allocate retained earnings into paid up capital in the stock holders’ equity

section of the company balance sheet. Alternatively, if a company decides to make a bonus

issue by using accumulated capital reserves, it adjusts the accumulated capital reserves into

paid-up capital. In both the cases the company does not receive any cash. They result in

each stock holder holding a greater number of stocks, but with more stocks on issue their

relative claim on the assets of the company is smaller. There is no effect on stock holder’s

proportional ownership of stocks, capital structure and financial position of the company.

Miller and Modigliani (1961) demonstrated theoretically that bonus issues along with other

types of dividends do not alter shareholder wealth. The modification triggered by the bonus

issue is that the number of outstanding shares is adjusted by the bonus issue ratio, therefore

the price of the share declines according to the same bonus issue ratio. The total market

value of the shares or the values of the shares that are held by each investor should remain

unchanged.

Companies are not required to take any specific approval from SEBI to issue bonus shares,

though they have to follow certain SEBI guidelines mentioned below:

Bonus shares can be issued only out of free reserves built out of the genuine profits or

share premium collected in cash only. Companies cannot issue bonus shares in lieu

of dividend or if it had come out with any public / rights issue in the past 12 months.

Bonus issue cannot be made on partly paid up existing shares.

It should be ensured that the company has not defaulted in payment of interest or

principal in respect of fixed deposits and debentures and in the payment of statutory

dues of the employees.

Memorandum and Articles of Association are required to be altered if they do not

provide the provision of bonus issue in respect of authorized share capital or

capitalization of reserves.

Companies are required to implement the bonus proposal within a period of 6 months

from the date of approval at the meeting of board of directors, and the new shares are

to rank pari-passu with the existing shares.

6

Stock split and bonus issues are similar in several aspects. In particular, they are both

corporate events in which each shareholder receives a certain number of new shares free of

charge, whereby the stock price is reduced accordingly. However, there is at least one

important difference between the two events that is often neglected in the literature. In the

case of a stock split, each old share is split into a number of new shares with a reduced par

value, leaving the total share capital unchanged. In the case of a bonus, a number of new

shares are received for each share owned. The new shares have the same par value as the old

shares, whereby the total share capital increases proportionately with the size of the bonus.

Brealey and Myers (1996, p. 419) characterize the difference between a stock split and a

stock dividend (bonus) in the following terms: A stock dividend is very much like a stock split. Both increase the number of shares, and both reduce value

par share, other things equal. Neither makes anybody better off. The distinction between the two is a

technical one. A stock dividend is shown in the accounts as a transfer from retained earnings to equity

capital, whereas a split is shown as a reduction in the par value of each share.

3. EFFICIENT MARKET HYPOTHESIS AND STOCK SPLIT / BONUS ISSUES

Efficient Market Hypothesis (EMH) states that all relevant information is fully and

immediately reflected in a security’s market price, thereby assuming that an investor will

obtain an equilibrium rate of return. In other words, an investor should not expect to earn an

abnormal return. Fama (1970) identified three forms of market efficiency namely, the weak,

semi-strong and strong form. The weak from of efficiency suggest that current share prices

fully reflect any past information contained within past share prices. The semi-strong form

extends the notion of efficiency a little further and describes the situation where any

published information relating to a company will be reflected in its share price. The strong

form describes the situation where all relevant information, whether it is within the public

domain or outside the public domain, will be reflected in the price of a share. Subsequently,

Fama (1991) changed the categories and coverage of informational efficiency. According to

him, the first category (weak form), now covers the more general area of test for return

predictability, including work in forecasting returns with variables like dividend yields and

interest rates. Further seasonality in returns and volatilities of security prices are to be

considered under the theory of return predictability. He further continued that semi-strong

7

tests will now be called event studies and strong form tests will be called tests for private

information. In event studies, it is measured how rapidly security prices respond to different

items of news, such as an earnings or dividend announcement, news of a takeover, or

macroeconomic news. The study on stock price reaction for stock splits/ bonus issues is thus

based on test of semi-strong form of market efficiency.

The EMH of near perfect capital markets that renders only fleeting and non-systematic gain

and loss opportunities to investors has been criticized in recent years by the behavioral

finance literature. Because according to the behavioral finance, stock transactions are often

executed (in relation to known events such as stock issues, stock split, share buy-back) at

price levels that imply predictably high or low risk adjusted return. If these findings are

factually correct, they pose a challenge to the EMH, which predicts a lack of capital market

profit or loss opportunities due to the ability of investors rapidly and unbiasedly to interpret

information according to correct assessments of the underlying economic process. The

behavioral literature attributes its findings to various investors’ biases. Supporters of

efficient market argue that risk adjustment methods in behavioral finance are imperfect, data

mining may have occurred. According to them all the behavioral anomalies taken together

suggest an unbiased market at work and they asked for behavioral models that explain a

broader range of evidence (see Fama, 1998). On the other hand, Haugen (1999-2002)

responds from the behavioral camp by pointing out the superior powers of capital market

phenomena like momentum to predict and explain returns.

Although stock dividend and stock split, unlike most cash dividend and capital structure

changes do not directly affect the corporate cash flows, a large number of studies in Finance

give evidence on positive stock price reactions in response to such announcements. Still,

very little is known about the exact explanation for the positive announcement effect. Ball,

Brown and Finn (1977) investigated stock price reaction around the announcements of ‘stock

capitalization changes’ (bonus stock issues, stock splits and rights issues) in Australia for the

period between 1960 and 1969 using monthly data. They found 20.2% abnormal returns for

13 months up to end including the month of bonus issue announcements.

8

Only a few papers have explored the issue, stock split and stock dividend when examining

the announcement effect. One of the few studies making this distinction is that of Rankine

and Stice (1997), who document that, stock dividends are generally associated with a higher

announcement effect than stock split. Their explanation for these findings is that stock

dividend are a stronger signal since “ by voluntary reducing the existing pool of distributable

funds, managers of undervalued firms can signal their confidence that such a reduction will

not negatively impact the firm’s ability to make future cash distributions”, which is the

rationale behind the retained earnings hypothesis. A more recent paper of Bechmann and

Raaballe (2005) examines the differences between stock split and stock dividend in the

Denmark stock market. Bechmann and Raaballe found that the announcement effect of stock

dividend as well as stock split is closely related to changes in a firm’s payout policy, but that

the relationship differs for the two types of events – support of the retained earnings / cash

dividends hypothesis for stock dividends and the cosmetic / cash dividend hypothesis for

stock split.

4. LITERATURE REVIEW

Several studies have considered the relation of the announcement effect to stock split and

stock dividends since Fama et al. (1969) found that the two types of events are associated

with a positive stock market effect. Broadly speaking, the literature in this area can be split

along three categories: the first category deals with the potential theoretical reasons that can

explain why managers may resort to stock splits and stock dividends. The second category

consists of papers that are predominantly of empirical nature and those who investigate and

document the reaction of the stock market around the announcement (and / or the ex-date) of

the decision to split/ bonus; we term this literature as ‘event’ analysis literature since it

follows a classical event analysis methodology. The third category of papers deals with the

long term implications of stock split / stock dividend and compare variables such as rates of

returns, variance, short interest, market betas, traded volume, bid-ask spread, liquidity around

pre and post announcement periods. Our paper falls in the second category. We focus on

reviewing the literature from the point of different explanations for the announcement of

stock split and stock dividends.

9

The optimal trading range hypothesis suggests that a stock split and a stock dividend change

the stock price to a more optimal trading range which in turn increases the demand for stock,

leading to a positive stock price effect (Lakonishok and Lev, 1987). Forjan and McCorry

(1995) claim evidence for a increase in market liquidity. Several studies (including Dolley,

1933, Barker, 1956, and Lamoureux and Poon, 1987) report that the number of shareholders

increases after a split. Myers and Barkay (1948); Barker (1956); Johnson (1966) and

McNichols and Dravid (1990) provide further support for a optimal trading range.

The market maker hypothesis argue that a stock split and a stock dividend can increase the

relative bid-ask spread, whereby the market maker will be more active in promoting the

stock, leading to a positive stock market effects (Angel, 1997; and Schultz, 2000). Conroy et

al. (1990) document a decrease in bid-ask spread and an increase in true variance in the post

split period that is conformed by Dubosfsky (1991) and more recently by French and Foster

(2002).

According to Ross (1977) and Leyland and Pyle (1977), managers use financial decisions

such as stock split and stock dividends to convey favourable private information about the

current value of the firm. Klein and Peterson (1989), Grinblatt, Masulis, Titman (1984),

Brennan and Copeland (1988), Asquith et al (1989), Lakonishok amd Lev (1987) provide

further support for this. Ikenberry et al (1996) combine the trading range hypothesis with the

signaling hypothesis.

However, all studies in this area do not distinguish between stock split and stock dividend.

In a study, which does consider the difference between the events, Wulff (2002) looked at the

Greman stock market, and similar to Rankine and Stice (1997), found that the announcement

effect is more positive for stock dividend than for stock split. Grinblatt et al (1984) posit that

stock dividend signal greater future earnings expectations than stock split. They interpreted

it as evidence in favor of the ‘retained earnings hypothesis’: the dissimilar accounting

treatment of these two types of stock distributions affects retained earnings in different ways.

Eisemann and Moses (1978) surveyed manager’s views concerning stock dividend whereas

Baker and Gallagher (1980) surveyed manager’s views regarding stock split. The studies

10

reported that firms issue stock split to keep stock price in an optimal trading range whereas

that for stock dividend is related to a desire to conserve cash, to express confidence in the

firm and to increase the number of share holders.

A few studies have been carried out in recent years to test the announcement effect of bonus

issue in the Indian stock market. Ramachandran (1985) found mixed evidence for semi-

strong form efficiency of Indian stock market. Obaidullah (1992) and Rao (1994) found

positive stock market reaction to equity bonus announcements. Rao and Geetha (1996)

documented that one could not make excess money in the stock market by studying that

patterns of abnormal returns of announcements made earlier. Srinivasan (2002) found

extremely large positive abnormal returns on ex-bonus and ex-rights dates for equity stocks.

Mishra (2005) found significant positive abnormal returns for a five-day period prior to

bonus announcement. Similar study by Budhraja et al (2004) suggests that abnormal returns

in stock prices around the bonus announcement date over a three day trading period starting

one day before the announcement date is significant at 95% confidence limit. It also says

that much of the information in the bonus announcement gets impounded into stocks by the

time of announcement.

5. DATA AND METHODOLOGY

Data and Sample

The sample consisted of 90 stock splits and 82 bonus issues announced by companies listed

on the BSE 500 index during the period April 1, 2001 to 31st March 2007. The information

on stock splits and bonus issues is based mainly on press reports and leading newspapers

such as Economic Times and Business Standard. Additional information is taken from NSE

and BSE Website. The daily security and BSE 500 index closing prices are taken from BSE

Website. The event date is defined as the announcement date of the board meeting

considering stock splits or bonus issues. This approach assumes that the information was first

known to the market on the event date itself. In order to identify the announcement date as

exactly as possible, the event dates are cross checked with the Prowess Data base maintained

by CMIE.

11

Announcement Effects

The study used the event study methodology to examine the market reaction to bonus issues

and stock splits on share prices. For this purpose, the study used daily adjusted prices for

sample stocks for 40 days before and 40 days after the event date. In order to carry out an

event study, we determine the event window as t = -40 to t = +40 relative to the event day t =

0 (date of announcement of bonus/stock split). The return on the market portfolio is proxied

by the BSE 500. The event window is taken as t = -40 to t = -41 relative to the event day t =

0. Our aim is to find whether the events have any signaling impact on the share prices. In the

signaling hypothesis, it has been stated that managers often resort to bonus issues/stock splits

in order to signal positive information about the firm. This results in a price increase after the

announcement of the event. The procedure for using event study is discussed below.

Estimation Procedure

The purpose of our study is to determine whether there is any abnormal return around the

event dates and how fast the new information is absorbed in the security prices. For the

purpose of the study, we constructed a null hypothesis (H0) as follows:

There is no significant Average Abnormal Return (AAR) around the event dates, i.e. 1/n∑AR

= 0

where n is the number of sample companies.

We focus on the abnormal returns of our sample in the period over 40 days prior and 40 days

after the event date. Brown and Warner (1980) reported that ‘a simple methodology based on

the market model is well-specified and relatively powerful under a wide variety of

conditions.’ Following Brown and Warner, we employ the market model to compute the

abnormal returns that are derived from the following equation:

Rj,t = άj + βjRmt + έjt

Where, Rj,t = the daily return security j at day t

12

Rmt = the daily return on Indian stock market at day t

άj , βj = OLS intercept and slope coefficient estimators, respectively

έjt = the error term for security j at day t

We use the BSE 500 price index as a proxy for computing market return. To compute daily

market return, we use logarithm of daily return to avoid serial correlation.

Rmt = Log (It/It-1)

The daily return for security j is:

Rjt = Log (Rt/Rt-1)

άj , βj are derived from the market model over one year prior to the event month. The

expected returns for security j at day t are defined as,

ERjt = άj + βjRmt

Where άj, βj are OLS estimators of (άj , βj).

We measure the daily abnormal return as ARjt = Rjt – ERjt. For each event date t, the cross

sectional average abnormal returns for all firms are defined as:

n AARt = 1/n∑ έjt J=1 t = -40 to +40

n = 82 for bonus issues &

n = 90 for stock splits

To analyse the price effects, we compute the Cumulative Average Abnormal Returns

(CAAR) for the 81 days centered in the announcement dates. The use of CAAR is a common

methodology. CAAR for event days t1 to t2 were obtained as follows:

t2 CAAR = ∑AARt

t=t1

13

6. RESULTS

In the study we considered the event window of 81 days consisting of t-40 to t+40 relative to

event day t0. Event date is date of announcement of bonus or stock split.

The aim of the study being exploring efficiency characteristics of the Indian stock market, it

is tried to explore, whether the Average Daily Abnormal Returns are indicating any pattern

or not. Further whether any sample company delivers abnormal returns on and around

announcement date is also investigated.

The results of our study concerning the daily AAR of bonus issues are presented in

Annexure I. On the announcement date, there is positive average abnormal return of 1.8%

which is very significant at 0.01% level. The results of the event study concerning the daily

AAR of stock split announcements are presented in Annexure II. Table 1 summarises the

impact of bonus issues or stock splits on share price performance. We found that 77% of

sample companies have positive mean return in respect of stock split whereas that for bonus

issues is 57%. Hence stock splits may give an investor more return than that from bonus

issues, considering entire event window. But on announcement date of bonus, 83% of sample

companies experienced positive return compared to 69% of sample companies having

positive return on stock split announcement date. Thus on the announcement date, reaction of

market participants to bonus issues found to be more positive than that to stock splits.

14

Table 1

Impact of Event (Bonus Issues or Stock Splits) Announcement on Share Price Performance

Bonus Issues Stock Splits Particulars

No. of companies Percentage No. of companies Percentage

Companies having positive mean return during event window

47 57% 66 73%

Companies having negative mean return during event window

35 43% 24 27%

Companies having positive return on announcement date

68 83% 62 69%

Companies having negative return on announcement date

14 17% 28 31%

Total 82 100% 90 100%

Table 2 displays the statistical significance of the abnormal returns. It is observed that more

companies are having statistically significant abnormal return in respect of stock splits

considering entire event window. It may suggest that chances are more to have abnormal

return during stock split announcement than during bonus issue announcement.

Table 2

Bonus Issues and Stock Splits: Statistical Significance of Abnormal Returns Bonus Issues Stock Splits Particulars

No. of companies Percentage No. of companies

Percentage

Companies having significant AAR at 1% level

6 8% 9 10%

Companies having significant AAR at 5% level

5 6% 11 12%

Companies having significant AAR at 10 % level

5 6% 5 6%

Not significant 66 80% 65 72% Total 82 100% 90 100%

15

To track abnormal returns over a number of trading days, cumulative abnormal return

(CAAR) is computed through out the event period for bonus issue and stock split separately.

Table 3 presents mean CAAR across different event windows.

Table 3

CAR across the Event Windows Days Bonus Issues Stock Splits

Mean CAAR Variance Mean CAAR Variance t-40 to t-21 -0.00007 0.00001 .00176 0.000002

t-20 to t-1 0.00137 0.00000 .000627 0.000001

t0 to t1 0.0123 0.00006 .00767 0.00001

t-1 to t1 0.01012 0.00005 .00621 0.00001

t+2 to t+20 0.00045 0.00000 .000186 0.00001

t+20 to t+40 -0.0007 0.000006 .000665 0.00001

t-40 to t+40 0.000567 0.00001 .000988 0.00001

Fig. 1 & 2 gives line graph showing CAAR over the event window. For both events we find

the typical price movement. On the announcement date, there are big upward jumps and

after the run up is over, there is no further drift in stock price. The pattern of CAAR of bonus

issue is typical and there is significant AR around announcement date. It is found that on an

average, sample stocks having bonus announcements, start showing positive AR around 17 to

16th days before the announcement date. On the other hand, CAAR of stock splits for sample

stocks are positive during entire event window. It appears that companies experiencing bull

run are resorting to stock splits. AARs far before the announcement dates are not generally

significant. Post announcement AARs for bonus issues are mixed and not significant except

first and fourth day. Except the first post announcement date, no other post announcement

dates are having significant AAR for stock splits.

16

Fig 1 CAAR for Bonus Issues

Fig 2 CAAR for Stock Splits

CAR Day Wise

0.000000.010000.020000.030000.040000.050000.060000.070000.080000.09000

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81

Days

Ret

urn

Series1

17

5. CONCLUSION

This paper examines the announcement effects of stock splits and bonus issues on the Indian

stock market during the period April 2000 to March 2007. An event study is conducted

using a 81-day event window. The `study finds a positive AAR of 1.8% in respect of bonus

issues which is relatively high and very significant at 0.01% level. In respect of stock split,

the AAR is of 0.8% which is also very positive and highly significant at 0.01% level. Our

findings about stock splits differ from that of Gupta et al. (2007) who found that there was no

announcement effect associated with stock split in India. On an overall basis, the pattern of

CAAR is found to be in accordance with expectations thereby lending support to the

hypothesis that Indian stock market is efficient in semi strong form. Also our study supports

the signaling hypothesis consistent with the findings in the developed stock market.

Bonus issues and stock splits are considered to be cosmetic events and except accounting

treatment, their impacts are likely to be the same. Interestingly, we found that bonus issues

result in sharp spike on the announcement date. Stock splits announcements are resulting in

positive returns during entire event window although effect on announcement date is not that

sharp. It may be due to the fact that stock splits are more common for momentum stocks

whereas bonus issues are made for all type of stocks. This phenomenon may need further

exploration.

18

Annexure I

Share Price Reaction around Bonus Issue (81 days window)

Day AAR CAAR t-value Sig 2 tail -40 -0.00047 -0.00047 -0.418 0.677 -39 0.000382 -8.5E-05 0.296 0.768 -38 0.001749 0.001665 1.535 0.129 -37 -0.00079 0.000876 -0.701 0.486 -36 -0.0092 -0.00833 -0.52 0.605 -35 0.000535 -0.00779 0.44 0.661 -34 0.001035 -0.00676 0.768 0.445 -33 -0.00056 -0.00731 -0.316 0.753 -32 0.001123 -0.00619 0.683 0.496 -31 -0.00016 -0.00635 -0.111 0.912 -30 0.001534 -0.00481 1.256 0.213 -29 0.00041 -0.00441 0.356 0.722 -28 0.000351 -0.00405 0.289 0.773 -27 -0.00161 -0.00566 -1.331 0.187 -26 0.001222 -0.00444 1.007 0.317 -25 0.001216 -0.00323 0.838 0.404 -24 -6.4E-05 -0.00329 -0.05 0.96 -23 0.000192 -0.0031 0.157 0.875 -22 -0.00067 -0.00377 -0.473 0.638 -21 0.002463 -0.00131 1.866 0.066 -20 -0.00067 -0.00198 -0.644 0.521 -19 0.000582 -0.0014 -0.1331 0.187 -18 -0.00081 -0.00221 -0.734 0.465 -17 0.001108 -0.00111 0.873 0.385 -16 0.002186 0.001081 2.243 0.028 -15 -0.00048 0.000597 -0.404 0.687 -14 0.00298 0.003577 1.927 0.058 -13 -3.7E-05 0.00354 -0.03 0.976 -12 0.002033 0.005573 1.366 0.176 -11 0.001082 0.006655 1.064 0.291 -10 0.001666 0.008321 0.785 0.435 -9 0.000547 0.008869 0.301 0.764 -8 0.002409 0.011278 1.625 0.108 -7 0.000949 0.012227 0.67 0.505 -6 0.000116 0.012343 0.073 0.942 -5 0.001949 0.014292 1.413 0.161 -4 0.003297 0.017589 1.769 0.081 -3 0.000653 0.018241 0.441 0.66 -2 0.002691 0.020933 1.779 0.079 -1 0.005202 0.026135 2.964 0.004 0 0.017969 0.044104 6.498 0 1 0.007201 0.051305 3.203 0.002 2 0.000553 0.051858 0.331 0.741

19

3 -0.00029 0.051572 -0.151 0.88 4 0.003089 0.054661 1.811 0.014 5 0.003433 0.058094 2.035 0.045 6 3.4E-05 0.058128 0.022 0.982 7 0.001648 0.059776 1.055 0.294 8 -0.00111 0.058669 -0.983 0.329 9 -3.2E-05 0.058637 -0.028 0.977 10 -0.00132 0.057314 -1.073 0.287 11 -0.00173 0.055585 -1.334 0.186 12 0.000445 0.056031 0.406 0.686 13 0.000188 0.056219 0.227 0.821 14 -0.00175 0.054471 -1.585 0.117 15 0.000856 0.055327 0.792 0.431 16 1.42E-05 0.055342 0.01 0.992 17 -0.00022 0.055126 -0.162 0.872 18 0.0019 0.057026 1.696 0.094 19 0.001611 0.058636 1.311 0.194 20 0.001237 0.059874 0.986 0.327 21 0.000621 0.060495 0.46 0.647 22 0.001435 0.061929 1.324 0.19 23 0.00033 0.06226 0.262 0.794 24 0.000905 0.063165 0.819 0.415 25 -0.00191 0.061252 -1.215 0.228 26 0.003153 0.064405 1.823 0.012 27 -0.0042 0.060205 -1.466 0.146 28 0.001362 0.061568 0.275 0.275 29 -0.00368 0.057884 0.002 0.002 30 -0.00085 0.057031 0.532 0.532 31 -8.7E-05 0.056944 0.941 0.941 32 -0.00231 0.054631 -1.961 0.053 33 -0.00302 0.051616 -1.562 0.122 34 -0.00072 0.050898 -0.434 0.666 35 0.000145 0.051043 0.084 0.933 36 -0.00279 0.048253 -0.785 0.435 37 0.00284 0.051093 1.484 0.142 38 -0.00641 0.044688 -1.088 0.28 39 0.000216 0.044904 0.177 0.86 40 0.00105 0.045954 0.448 0.656

20

Annexure II

Share Price Reaction Around Stock Split (81 days window)

Day AAR CAAR t-value Sig 2 tail -40 0.001327 0.001346 0.834 0.407 -39 0.001289 0.002636 0.989 0.325 -38 0.003762 0.006398 2.608 0.011 -37 0.002091 0.008489 1.315 0.192 -36 0.002563 0.011052 1.617 0.11 -35 0.003987 0.015039 2.617 0.01 -34 0.000635 0.015674 0.402 0.688 -33 -0.00164 0.014032 -1.102 0.273 -32 0.000595 0.014628 0.568 0.571 -31 0.001077 0.015704 0.837 0.405 -30 0.00534 0.021044 3.532 0.001 -29 0.001401 0.022445 1.097 0.275 -28 0.002535 0.02498 1.612 0.11 -27 0.003052 0.028032 2.059 0.042 -26 0.001154 0.029186 1.825 0.071 -25 0.001955 0.03114 0.86 0.392 -24 0.00087 0.032011 0.627 0.532 -23 0.001893 0.033903 1.44 0.153 -22 -0.00147 0.032435 -1.164 0.247 -21 0.002859 0.035294 2.113 0.037 -20 0.002818 0.038112 1.85 0.068 -19 0.001471 0.039583 1.011 0.315 -18 0.000456 0.040039 0.331 0.741 -17 0.00138 0.041419 0.852 0.397 -16 -0.00066 0.040762 -0.659 0.512 -15 -0.00153 0.039235 -1.37 0.174 -14 0.00185 0.041086 1.351 0.18 -13 0.001938 0.043023 1.52 0.132 -12 -0.00045 0.04257 -0.439 0.662 -11 -0.00013 0.042444 -0.105 0.917 -10 -0.00053 0.041911 -0.468 0.641 -9 -0.00059 0.04132 -0.409 0.684 -8 0.000999 0.042319 0.768 0.444 -7 -0.00031 0.042012 -0.281 0.778 -6 -0.00027 0.041743 -0.279 0.781 -5 0.002064 0.043806 1.684 0.096 -4 0.001071 0.044877 0.839 0.404 -3 0.000139 0.045017 0.141 0.888 -2 -0.00048 0.04454 -0.363 0.718 -1 0.003294 0.047834 2.676 0.009 0 0.008677 0.056512 4.824 0 1 0.006664 0.063176 3.54 0.001 2 0.002109 0.065285 1.499 0.137

21

3 -0.00183 0.063459 -1.353 0.179 4 0.0005 0.063959 0.405 0.686 5 0.001139 0.065098 0.76 0.449 6 -0.00073 0.064371 -0.591 0.556 7 -0.00132 0.063051 -0.955 0.342 8 1.46E-05 0.063065 0.109 0.914 9 0.00073 0.063795 0.222 0.825 10 0.000116 0.063912 0.01 0.992 11 -0.00378 0.060134 -1.19 0.237 12 0.000249 0.060383 0.616 0.54 13 -0.00211 0.058275 -1.699 0.093 14 -0.00017 0.058101 -0.143 0.887 15 0.000361 0.058463 0.345 0.731 16 0.000734 0.059196 0.672 0.503 17 0.001833 0.061029 1.17 0.245 18 0.002027 0.063056 1.45 0.151 19 0.002179 0.065235 2.111 0.038 20 0.001478 0.066713 1.087 0.28 21 0.00036 0.067073 0.319 0.75 22 0.000197 0.067269 0.221 0.826 23 0.000551 0.06782 0.518 0.606 24 -5.9E-05 0.067761 -0.042 0.966 25 0.001946 0.069707 1.484 0.141 26 0.000394 0.070101 0.342 0.733 27 -0.00072 0.069381 -0.598 0.551 28 0.002676 0.072057 2.537 0.013 29 0.002142 0.074199 1.927 0.057 30 0.00369 0.077889 2.815 0.006 31 -0.00087 0.077019 -0.733 0.466 32 0.001263 0.078282 1.351 0.18 33 -0.00043 0.077848 -0.36 0.72 34 0.000481 0.078329 0.449 0.654 35 0.000573 0.078902 0.524 0.602 36 -0.00066 0.078247 -0.579 0.564 37 -0.00064 0.077604 -0.549 0.585 38 0.000659 0.078263 0.624 0.534 39 0.001139 0.079402 0.728 0.469 40 0.00062 0.080022 0.585 0.56

22

References:

Anjel, J (1998), “ Tick Size, Share Prices, and Stock Splits,” Journal of Finance, Vol. 52,

pp.655-681.

Anjel, J, Brooks, R, and Mathew, P (1997), “ When –issued Shares, Small Traders, and the

Variance of Returns Around Stock Splits.” Working paper, Georgetown University.

Amthud, Y, and H, Mendelson (1986), “Asset pricing and the bid-ask spread”, Journal of

Financial Economics 17, pp.223-49.

Asquith, P, Healy, P and K, Palepu (1989), “Earnings and Stock Splits,” The Accounting

Review, Vol. 64, pp. 387-403.

Baker, H, K and P. L. Gallagher (1980), “Management’s view of stock splits”, Financial

Management 9, pp.73-77

Bearly, R. A. & Myers, S. C. (2000), Principles of Corporate Finance, Irwin Mc-Graw Hill,

Boston.

Brennan, M, J, and T, E, Copeland (1988), “Stock splits, stock prices, and transaction costs”,

Journal of Financial Economics 22, pp.83-101.

Budharaja, I, Parekh P and Singh T (2004), “ Empirical Study on Market reaction Around

the Bonus and Stock Split”, www.Indiainfoline.com.

Copeland, T (1979), “Liquidity changes following stock splits”, Journal of Finance 34,

pp.115-41.

Dolley, J (1933), “ Characteristics and Procedure of Common Stock Split –Ups”, Harvard

Business review, Vol. 11, pp. 316-326.

23

Elgers, P T, Murray D (1985), “Financial Charaecteristics Related to Management’s Stock

Split and Stock Dividend Decisions”, Journal of Business Finance and Accounting, 12(4).

Fama, E F, L Fisher, M Jensen and R Roll (1969), “The Adjustments of Stock Prices to New

Information,” International Economic Review, Vol 10, pp.1-21.

Grinblatt, MS, Masulis R W and Titman, S (1984), “The Valuation Effects of Stock Splits

and Stock Dividends,” Journal of Financial Economics, Vol. 13:4 (Dec), pp. 461-90.

Graeme Rankins and Earl K. Stice, (1997), “The Market Reaction to the Choice of

Accounting Method for Stock Split and Large Stock Dividend”, Journal of Financial and

Quantitative Analysis, Vol.32, No.2.

Ikenberry, D, G.Rankine, and L. Stice (1996), “What do Stock Splits really signal?” Journal

of Financial and Quantitative Analysis 31, pp.357-75.

James A. Millar, (1977), “Split or Dividend: Do the Words Really Matter?” The Accounting

Review, Vol. L32, No. 1, pp.52-55.

Kryzanowski, L and Zhang, H (1996), “Trading Patterns of Small and Large Traders Around

Stock Ex-Split dates,” Journal of Financial Research, Vol.19, pp.75-90

Lakonishok, J and Lev, B (1987), “ Stock Plits and Stock dividends: Why, Who and When,”

The Journal of Finance, Vol.42, pp. 913-32.

Lijleblem, E (1989), “The Informational Imapct of Announcements of Stock Dividends and

Stock Splits,” Journal of Business Finance and Accounting, Vol. 16:5 (Winter), pp.681-98.

McNichols, M and dravid, A (1990), “ Stock Dividends, Stock Splits and Signaling,” Journal

of Finance, Vol. 45:3 (July), pp.851-79.

24

Mishra, A.K.(2005), “An Empirical Analysis of Market reaction Around the Bonus Issues in

India”, The ICFAI Journal of Applied Finance, Vol.11, No.7, pp.21-39.

Mukherji, S,. Y, Kim, and M. Walker (1997), “The effect of stock splits on ownership

structure of firms”. Journal of Corporate Finance 3, pp.167-88.

Murray, D (1985), Further evidence on the liquidity effects of stock splits and stock

dividends. Journal of Financial Research 8, pp.59-67.

Muscarella,C and M, Vetsuypens (1996), “Stock splits: Signaling or Liquidity? The case of

ADR “Solo-Splits””, Journal of Financial Economics, 42, pp.3-26.

Peterson, C, A, Millar J, A, and Rimbay, J. N. (1996), “The Economic Consequences of

Accounting for Stock Splits and Large Stock Dividends”, The Accounting Review, Vol. 71.

No. 2, pp.241-253.

Schuitz, P (2000), “Stock Splits, tick size and sponsorship”, Journal of Finance, 55, pp.429-

50.

Taylor W. Foster III and Don Vickrey, (1978), “The Information Content of Stock Dividend

Announcements”. The Accounting Review, pp.360-370.