ABSTRACT
An efficient market hypothesis asserts that all stocks are
perfectly priced according to their inherent investment properties, the
knowledge of which all market participants possess equally. In semi-strong-form
efficiency, it is implied that share prices adjust to publicly available new
information very rapidly and in an unbiased fashion, such that no excess
returns can be earned by trading on that information. Among these market
events, bonus issues from twenty-five companies decomposed into different sizes
of small and high bonus, were selected after adjusting for daily stock and
market returns for a period of one year to empirically test the semi-strong
form efficient market hypothesis of the Nigerian Stock Exchange. Our study used
the Event Study Methodology. The abnormal returns were calculated using the
Market Model and T-test were conducted to test the significance. Results showed
that bonus issues have signaling impact on share prices on announcement date.
The result supports the signaling hypothesis, which states that managers often
resort to bonus issues in order to signal positive information about the firm.
As a result, we reject the null hypothesis and accept the alternative
hypothesis. Despite the positive signaling, shareholders lost more value in the
ex-bonus period than the value gained on event date. The different sizes of
bonus issues do not matter to shareholders rather any increase on their
shareholdings suffices. The cumulative abnormal returns (CARs) are
statistically not significant. On the whole, the study found evidence that the
Nigerian Stock Exchange is semi-strong inefficient. Consequently, the market
should be deregulated to allow for foreign participation so as to have a more
healthy competition. Also the buy-and–hold attitude of Nigerian shareholders
should be discouraged.
CHAPTER
ONE: INTRODUCTION
1.1. BACKGROUND
OF THE STUDY
According to the Efficient Market Hypothesis (EMH), as
prices respond to information available in the market, and because all market
participants are privy to the same information, no one will have the ability to
out-profit anyone else. The nature of information does not have to be limited
to financial news and research alone; indeed, information about political,
economic and social events, combined with how investors perceive such
information, whether true or rumoured, will be reflected in the stock price
(Reem, 2008). In efficient markets, prices become not predictable but random,
so no investment pattern can be discerned. A planned approach to investment,
therefore, cannot be successful.
Accepting the EMH in its purest form may be difficult;
however, Fama (1970) identified three classifications of efficiency which are
aimed at reflecting the degree to which it can be applied to markets: weak
form, semi-strong form and the strong form. The weak form version claims that
all past prices of a stock are reflected in today’s stock price. Therefore,
technical analysis cannot be used to predict and beat a market. The Semi-strong
form efficiency version, implies that announcement of all public information
are reflected in stock prices instantaneously and without bias.
Neither fundamental nor technical analysis can be used to achieve superior
gains. The Strong-form efficiency known as the strongest version, states that
all information in a market, whether public or private, is accounted for in a
stock price. Not even insider information could give an investor an advantage.
Fama (1991), however, changed the three classifications; the weak form now
called ‘test for return predictability’; semi-strong form now called ‘event
study’ and the strong form he called ‘test for private information’.
Generally, the investigation of semi-strong form market
efficiency has been limited to the study of well developed stock markets. Over
the past half century, event studies have been employed in much research and
their sophistication has been greatly improved by authors such as Fama, et al
(1969) and Brown and Warner (1980, 1985). Examples of events under semi-strong
form consideration include; stock splits, stock issuance (bonus issue, public
offerings), earnings announcements, merger or takeover announcements,
regulatory change, hiring or firing of high level officers, among others.
However, this study is on the public information/announcement of bonus issues.
In this study; we employ event study methodology, which was first applied by
Dolley in 1933 to examine this event for the stock market of a transition
economy, Nigeria.
Event study analysis are typically used for two different
purposes: as a test of semi-strong form market efficiency; and assuming that
the market efficiency hypothesis holds, as a tool for examining the impact of
some events on the wealth of firms’ shareholders. This study provides an
initial empirical evaluation of semi-strong form market efficiency of the
Nigerian Stock Exchange, using event study techniques.
In practice, ipso facto,
there may be an increase in share price following the announcement of a bonus
issue. Such increase can occur because the announcement of a bonus issue may
have beneficial information content (Peterson, 1989). Shareholders are aware
that, after the bonus issue, companies usually increase total dividend payout.
This, in turn, indicates the confidence of management in the company’s future.
Consequently, the share price may increase in response to this information and
affect shareholders’ wealth. The informational link between dividends and
earnings is supported empirically.
by Healy and Palepu (1988). They show that firms that
initiate dividends have significant increases in earning for at least one year
after the announcement. See similar work of foster and vickrey (1978).
Also, management may believe that reducing the market price
per share to a reasonable level facilitates trade in the company’s shares and
that this in turn may increase the demand (the so-called “trading range
hypothesis”). If this were true, the market value of the company’s equities and
hence shareholders’ wealth again would increase. An alternative way to reduce
market price per share is a stock split, which represents a reduction in the
par value. The essential difference between a bonus issue and a stock split
need not be accompanied by a book entry to relocate earnings or accumulated
reserves into paid up capital in the shareholders’ funds section of the company
balance sheet.
According to the tax authority, shareholders must pay tax
for a cash dividend but not for a stock dividend. In other words, they need not
pay tax on the bonus, which makes the bonus more favourable than a cash
dividend. In addition to this institutional advantage and to the
retained-earnings hypothesis, there is some anecdotal evidence pertaining to
Nigeria that suggests bonus issues signal that management is confident about
the company’s future growth opportunities. However, this may not mean that in
Nigeria, shareholders/investors welcome all bonus issues. A research and
development director of one of Nigerian’s leading financial institutions
affirmed that this is indeed the case, and that high bonus issues signal
potential expansion of the company, whereas not so much with small-bonus
issues.
1.2 STATEMENT
OF PROBLEM
In developed countries, many research studies on semi-strong
form efficiency have been conducted to test the efficiency of stock market with
respect to information content of events. Whereas in Nigeria, very few studies
have been conducted to test the efficiency of the stock market with respect to
bonus issue announcement. Bonus issues continue to generate interest in the
country, yet have no 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 on semi-strong form market efficiency has
been carried out in so many countries, such as in America, Germany, Australia,
Denmark, China, India on bonus issues and results has shown that the market
react positively to the announcement [McNichols and Dravid (1990), Lijleblom
(1989), Dhar and Chhaochharia (2007), Ma and Barnes (2002), Obaidullah (1990)].
Numerous studies on semi-strong form of efficient market in Nigeria have dealt
with information content of various types of announcements (Adeleyan (2001),
Kolo (2004), Omoruyi (2007)). However, to the best of my knowledge, no
contemporary study has investigated the information content of bonus issue
announcement in the Nigerian context. This deficiency provided the raison
d’etre and primary impetus for this study......
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