EFFECTS OF STOCK SPLIT ANNOUNCEMENTS ON STOCK

PRICES OF PUBLIC QUOTED FIRMS IN KENYA

BY

KEFA MICHAEL GITAU NGOIRI

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017

EFFECTS OF STOCK SPLIT ANNOUNCEMENTS ON STOCK

PRICES OF PUBLIC QUOTED FIRMS IN KENYA

BY

KEFA NGOIRI

A Research Project Report Submitted to the Chandaria School of

Business in Partial Fulfillment of the Requirement for the Degree of

Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017

ii

DECLARATION

I, the undersigned declare that this is my original work and has not been presented to any

other institution other than The United States International University for academic credit

Signature; ……………………………… Date; ………………………………..

Kefa M.G. Ngoiri (646964)

This project has been presented for examination with my approval as the appointed

supervisor

Signature; ……………………………… Date; ………………………………..

Dr.Francis Gatumo

Signature; ……………………………… Date; ………………………………..

Dean Chandaria School of Business

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ACKNOWLEDGEMENT

I first wish to thank the almighty God for his grace and gift of life and giving me patience

as I undertook the project as things got rough. Special thanks to my family for moral support

and more so to my mother Margaret Ngoiri for being there though out my life and providing

whatever I needed since my childhood, I salute you. I also wish to appreciate through this

project my grandmother Joyce Ngoiri, though not directly involved in the project she was

instrumental through her way of life which always keeps me going and picking myself up

when things get rough.

I also wish to acknowledge my Supervisor Dr.Francis Mambo Gatumo for having agreed

to supervise this project and for his guidance through the project.

For anyone who contributed towards this project please accept my kind appreciation.

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ABSTRACT

The general objective of this study was to examine effects of stock split announcements on

stock prices of public quoted firms in Kenya. The purpose of this study was to establish the

effects of stock split announcement on stock prices of public quoted firms in Kenya. The

study was guided by the following research questions; does stock split announcement result

in change of share price of public quoted firms in Kenya? and What is the effect of stock

split announcement on the stock volumes of public quoted firms in Kenya?

Descriptive research design was used seeking to explain the relationship between stock

split announcement and stock prices as well as stock volumes. Event study methodology

was employed to determine the effects of the split announcement. Stock price changes were

analysed to with an aim to determine if stock splits announcement bring about any

adjustment or changes in the Kenyan market. Daily stock price and volumes traded were

were recorded during the study period of 90 days comprising of 45 days before the split

and 45 days after the split.

The study established that announcement of stock split positively impacts on the share

prices but seldomly affects volumes traded. The study recommends that CMA should

consider having a policy to encourage firms to split their shares to increase their liquidity

and encourage retail investors to be active in the market. More researches should be

encouraged in this area and NSE should avail historical information freely which may also

encourage transparency and confidence in the market.

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TABLE OF CONTENT

DECLARATION................................................................................................................ ii

ACKNOWLEDGEMENT ............................................................................................... iii

ABSTRACT ....................................................................................................................... iv

LIST OF TABLES ........................................................................................................... vii

LIST OF FIGURES ....................................................................................................... viii

CHAPTER ONE ................................................................................................................ 1

1.0 INTRODUCTION........................................................................................................ 1

1.1 Background of the Study ............................................................................................... 1

1.2 Problem Statement ......................................................................................................... 4

1.3 Research Objectives ....................................................................................................... 6

1.4 Research Questions ........................................................................................................ 6

1.5 Significance of the Study ............................................................................................... 6

1.6 Scope of the Study ......................................................................................................... 7

1.7 Limitations of the Study................................................................................................. 7

1.8 Definition of Terms........................................................................................................ 7

1.9 Chapter Summary .......................................................................................................... 8

CHAPTER TWO ............................................................................................................... 9

2.0 LITERATURE REVIEW ........................................................................................... 9

2.1 Introduction .................................................................................................................... 9

2.2 Effect of Stock Split Announcement on Stock Prices ................................................... 9

2.3 Effect of Stock Split Announcement on Stock Volumes ............................................. 15

2.4 Conceptual Framework ................................................................................................ 20

2.5 Chapter Summary ........................................................................................................ 21

CHAPTER THREE ......................................................................................................... 22

3.0 RESEARCH METHODOLOGY ............................................................................. 22

3.1 Introduction .................................................................................................................. 22

3.2 Research Design........................................................................................................... 22

3.3 Population and Sampling Design ................................................................................. 22

3.4 Data Collection Methods .......................................................................................................... 23

3.5 Data Analysis Methods ................................................................................................ 24

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3.6 Chapter Summary ........................................................................................................ 24

CHAPTER FOUR ............................................................................................................ 25

4.0 RESULTS AND FINDINGS ..................................................................................... 25

4.1 Introduction .................................................................................................................. 25

4.2 Descriptive Statistics ................................................................................................................ 25

4.3 Normative Test............................................................................................................. 25

4.4 Change of Share Price .................................................................................................. 26

4.5 Average Stock Volume ................................................................................................ 27

4.5 Chapter Summary ........................................................................................................ 29

CHAPTER FIVE ............................................................................................................. 30

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ........................ 30

5.1 Introduction .................................................................................................................. 30

5.2 Summary ...................................................................................................................... 30

5.3 Discussion .................................................................................................................... 31

5.4 Conclusion ................................................................................................................... 33

5.5 Recommendations ........................................................................................................ 33

REFERENCES ................................................................................................................. 35

APPENDICES .................................................................................................................. 40

Appendix I: Letter of Introduction ............................................................................................. 40

Appendix II: Study Sample ............................................................................................. 41

Appendix III: Data Collection Sheet .............................................................................. 41

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LIST OF TABLES

Table 4.1: Descriptive Table Showing Statistics on the Announcement Day ................... 25

Table 4.2: T-test Paired Two Sample for Change of Share Prices .................................... 26

Table 4.3: T-test Paired Two Sample for Average Stock Volume (ASV)......................... 28

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LIST OF FIGURES

Figure 2.1: Conceptual Framework ................................................................................... 20

Figure 4.1: Reaction of Share Price to Share Split Announcement ................................... 29

1

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Capital markets are markets for long term reserves with maturity period of over one year.

This is the place where financial instruments like debentures, term credits, bonds, ordinary

shares, et cetera, are traded. Capital market money related organizations incorporate the

stock trade, employ buy organizations, building social orders and renting firms. The capital

market is extremely key as it gives long term reserves which are essential for speculation

choices. Capital markets encourage global capital stream and additionally going about as

vehicles through which outside ventures discover their way into the market (Lyroudi &

Dasilas, 2016). In Kenya, the capital market is an essential arm of the general budgetary

market that gives venture openings, dispenses funds to genuine speculation, conveys

financial assets of long term nature, shares speculation counsel to speculators, mobilizes

capital and hence help achieve real economic output, and also helps in pricing of securities

(Lyroudi & Dasilas, 2016).

The impact of stock split announcements on the value of the firm remains a big baffle. As

per Miller and Modigliani (2013), the value of a firm is not influenced by the firm’s strategy

on profit. The two contended that investors can find a balance on any profit arrangement

impact without having to change value of the firm. In any case, chat to their hypothetical

presumption, experimental investigations of the effect of stock profits on offer costs have

demonstrated that critical value responses happen on the announcement day (Lyroudi and

Dasilas, 2016).

Numerous hypothetical systems have attempted to clarify the way of the offer cost and

volume response to stock profit announcements, among which the flagging speculation is

unmistakable. This speculation suggests that stock profits are utilized by firms to lower the

data asymmetry amongst supervisors and investors about future income (Lamoureux and

Poon, 2012). Grinblatt et al., 2013). Different clarifications include: The money

substitution theory, which recommends that organizations issue stock profits as a substitute

for trade profits out request to ration their money holds (Doran and Nachtmann, 2013). The

speculation of typical trading range, which suggests that shares ought to be split by chiefs

to change the cost into a specific range while trading (Ambarish, et al., 2013); Additionally,

2

the speculation known as consideration getting, proposes that shares ought to be split by

directors so as to draw in the consideration of investors and financial examiners

(Grinblattetal.,2014).;The efficient market hypothesis (Francis et al., 2012); The liquidity

hypothesis which suggests that Managers declare Stock dividends to increase the liquidity

of their shares (Galariotis and Giouvris, 2014).

Expounding on the response of the share trading due to stock split announcement in the

United States, Francis et al., (2012) explains that, offer costs should completely mirror all

accessible data contained in the stock split on the day the announcements made for business

sectors to be proficient. This infers the costs of shares are relied upon to rapidly adjust to

the data about the split and not demonstrate any float in costs during the period before or

after the announcements made, and from which irregular returns are potentially figured out.

Many scholars have carried out studies on the impact of stock split announcement on stock

prices in different markets. The results of their studies are similar to those reported by Fama

et al. and support the notion that share prices react to stock split announcements (Doran

and Nachtmann, 2015; Dravid and McNichols, 2013; Banker et al., 2013; Aydogan and

Muradoglu, 2015; Olowe, 2015; Poon and Uddi 2015; Anderson et al., 2011; Elfakhani and

Lung, 2013; Balachandran et al., 2014; Farinha and Basilio, 2016; Leung et al., 2016; Dhar

and Chhaochharia, 2015; Woolridge, 2013; Grinblatt et al., 2014).

In addition to the same, a huge amount of empirical evidence tends to associate stock split

announcements with abnormal performance in share price. A lot of these evidence proposes

that positive stock split are linked to positive stock price reaction, while the reverse is

observed in terms of negative stock splits. This market phenomenon can be identified as

the information content hypothesis or dividend announcement effect. The profit flagging

theory is dependent on Miller and Modigliani (2013) which contends that profits may pass

on new data to the market if administrators have preferred data over financial specialists

with respect to the firms’ future prospects. Consequently, a profit increment (diminish)

passes on great (awful) news to the market and results in an upward (descending) value

response. The profits data substance was additionally structured to profit flagging sort

models by John and Williams (2015) and Bhattacharya (2013, 2015).

The empirical discoveries of Miller and Rock (2015) and other late reviews bolster the

Concept that offer costs respond to stock profit announcements notwithstanding when stock

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profits in themselves don't contain any conspicuous new data. The question that would take

after is that: what causes the offer value response to stock profit announcements? The

assumption is that the "amaze component" in stock profit announcements contains data that

is more essential to share costs than simply the extra assertion of shares. In their view,

Ondigo (2015), there is an association between stock profits and huge money profit expands

which the market acknowledges and afterward uses to re-assess the flood of offer salary

anticipated.

Subsequently, when the announcements of stock profits are made, the shares costs respond

in desire of future money profit increments. Also, the stock profit impact on offer costs

debilitates if the announcements related with a money profit diminish. This confirmation

recommends that offer costs respond to the future money profit ramifications of stock profit

announcements. In the 1980s, the Kenya government understood the need to plan and

actualize strategy changes to cultivate reasonable financial improvement with a proficient

and stable budgetary framework. In 1989, the Capital Markets Authority (CMA) was

framed to aid the formation of a favorable situation for development and improvement of

the nation's capital market (Ondigo, 2015).

A stock trade is one of the money related foundations of the capital market. Stock trades

are created alongside and are a fundamental piece of the free undertaking framework. The

requirement for this sort of market came to fruition therefore of two noteworthy qualities

of joint stock (open constrained) organization shares: they are irredeemable and, for them

to be transferred there is need for signing of a share transfer from, to facilitate the updating

of the issuing company’s shareholders register. A stock exchange is a special market place

where already held stocks and bonds are bought and sold (Onyango, 2014).

A stock split is the division of existing shares into multiple smaller shares. This is done by

issuing more shares to existing shareholders e.g. if there is a 3 for 1 stock split , this would

mean that for every one share held, the shareholder will have three subsequently if the

shares remarkable were 1 M then this will be 3 M post-split. It is intended to make the

shares of an organization more moderate by low salary financial specialists and in addition

to expand their liquidity in the market. Onyango (2014) characterized a stock split as a trade

of shares in which no less than five shares were disseminated for each four previously

extraordinary.

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This implied shareholders got extra shares for each offer already held. Dhar and

Chaochharia (2014) found that parts happened at any proportion; the most ordinarily

utilized ones being 2:1, 3:2, 5:4, 4:3, etc. After a two for one (2:1) split, for example, every

shareholder had twice the same number of shares, yet each spoke to a claim on just half as

a great split of the enterprise's advantages and income. Stock split have elicited few civil

arguments in the scholastic world with a few specialists contending this is only a restorative

since it doesn't have any basic or financial effect on an organization.

Several theories have been advanced on the impacts of share splits announcement on the

offer cost. Unusual returns have been witnessed around stock split announcements .In

normal and ideal circumstances nothing ought to change given the asymmetry of data

according to effective market speculation by Eugene Fama and all the more particularly the

semi-solid EMH which shows that new data is immediately integrated in the offer cost and

in this regard the announcement of the share split. As per Grinblatt et al. (2014), stock splits

were by and large accepted to be just corrective since the company's money streams were

not affected. In a hypothetical manner, share splits were thought to be corrective corporate

occasions as they simply indicated the separation of one offer into a s number of shares and

a lowering the cost of a share in the trade without changing shareholders' riches and relative

shareholdings. However, albeit early experimental reviews finding no strange execution

after Share splits, Fama et al. (2011) came up with a finding on a positively significant

market reaction to share split announcements. Stock splits then did not appear to be as

cosmetic as they should be.

1.2 Problem Statement

Most reviews done on stock split in different markets show that more often than not,

markets respond decidedly to stock split news. A study carried out in India on how the

market reacts to share split and bonus issues came up with a positive average abnormal

returns. In the study, it was noted that share split announcement had positive returns in the

period of the entire window though the effect was not as sharp on the announcement date

(McNichols and Dravid, 2013).

In Ghana, the market less significantly reacted to stock split announcement. Another study

carried out in 2012 in USA on market reaction to stock split by Alon and Mathias (2012)

in their master thesis found out that while in reality it is possible that managers split their

shares for investors who prefer low priced shares (Balachandran, 2014), or also attract other

5

investors to their stocks (Lin, 2009), market reaction to split announcements is likely not

driven by response to the motives indicated by the managers but by information related to

firms earnings thus reaffirming the information hypothesis.

However, an impeccable economic situation appears not to exist in this present reality and

along these lines productivity must be accomplished in specific measures (Kipronoh, 2014).

The Nairobi Securities Exchange has in the past encountered certain times of extraordinary

instability in costs. This is a pointer to the likelihood of Fundamental wasteful aspects

which impacts on the shareholder values (Kipronoh, 2014).

Crown Berger's offer cost descended from Ksh.38 to Ksh8 in August 2008, this would later

settle at Ksh.28 after the arrival of first half year results. From this illustration along these

lines one could presume that stock split announcement event for the most split causes stocks

to rise.(NSE, 2016)

According to Omenda, (2011), Kenol-Kobil, East African Cables, East African Breweries,

Industrial and Commercial Development Corporation (ICDC) and Barclays Bank of Kenya

(BBK) had highly priced shares and opted to split to make them affordable to the public,

investors and to benefit the company. The extent to which this serves its goal is yet to be

seen. Another firm that opted to split its shares despite the low price of shares was the Sasini

Tea and Coffee (now Sasini Ltd). All counters other than Sasini Ltd were trading at over

Ksh.200 prior to the announcement of the split. Sasini Ltd was at a high of Ksh. 185 prior

to the announcement.

There are contrasting views on effects of stock splits on the prices and volumes traded.

Equity Bank’s share prices went up by 3.95% in the year 2008 after having a 5-to-1 split,

KCB’s share price also went up by approximately 10% after a 10-to-1 split (April 2007)

and East Africa Cables share price shot up by 9.03% cent having done a 10-to-1 share split

in August 2006 Omenda, (2011).

On the other hand the opposite is depicted, share prices dipped immediately after the share

split event. Barclays Bank’s had a 5.45% drop in share price after its November 2016 split.

Nation Media Group’s also experienced a dip of approximately 10% after having a 2-to-1

split in the year 2008 Omenda, (2011).

The contrast informs this study as a conclusive finding is not yet available on stock split

announcement effect on share prices and trade volumes. Omenda (2011) carried out a study

6

on effects of stock splits on liquidity of companies listed in NSE and found that share prices

is likely to start low and after sometime appreciate tremendously or a short time. He found

out that in the case of splits, most managers in Kenya opt for stock splits to maintain an

optimal trading range. Yet existing empirical research, finds that the impact of split on

liquidity is mixed (Omenda, 2011).

A noteworthy issue exists with stock split announcements; the financial specialists view

and studies comes about have been known to change impressively. Most financial

specialists trust that costs of stocks will increment in incentive after stock split news since

offer costs are lower (Nachtmann, 2015).

The contrasting non conclusive findings of previous researches done informed this study

to effectively add to academia and policy on determining what effects stock splits

announcement have on stock prices and stock traded volumes.

1.3 Research Objectives

The purpose of this study was to establish the effects of stock split announcement on stock

prices of public quoted firms in Kenya.

1.4 Research Questions

1.4.1 Does stock split announcement result in change of share price of public quoted

firms in Kenya?

1.4.2 What is the effect of stock split announcement on the stock volumes of public

quoted firms in Kenya?

1.5 Significance of the Study

The study shall be of the following significance:

1.5.1 Practice

The results of this study are practically significant in several ways. More importantly, it

identifies the impact of stock split announcement on stock price and volume on public

quoted firm. It also provides information on the degree to which announcements affect

market dynamics.

1.5.2 Academia

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This study also wishes to make a contribution to academia on how significant stock split

announcements are on the value of the firm publicly quoted in Kenya. This will also add

value to literature in a rarely studied sub set of the market in Kenya as well as the rarely

studied volume reactions to share split announcements.

1.5.3 Policy

The findings of this research project will assist policy makers to have a broader perspective

on their understanding of market dynamics surrounding share split announcement and that

would greatly help in adoption of more customized and appropriate share split

announcement policy prescriptions.

1.6 Scope of the Study

The scope of the review is fundamentally constrained to stock split announcement and a

supposition that there is no other event during this time when the stock split news are

profited which will influence the stock cost. The period covered is the year 2009 to 2015

and with limitation to stock split announcement made by firms quoted in the NSE without

a specific focus on particular sections.

1.7 Limitations of the Study

The limitation of the study was that there are a few firms which have conducted a share

split in kenya at the Nairobi Securities Exchange. This was coupled by few researches done

on the topic making literature review limited I n terms of material.

1.8 Definition of Terms

1.8.1 Stock split

Break down of large stock units to smaller units so that their outstanding number increases

and decreases the par value (Elfakhani, 2013).

1.8.2 Stock split announcement

Stock split announcement refers to the point in time at which a firm public makes it known

to the public the extent of periodic distribution to its shareholders (Gitman, 2015).

1.8.3 Nairobi Securities Exchange (NSE)

8

The Nairobi Securities Exchange is the Kenyan stock market which is the trading platform

where stocks and bonds are traded. It encompasses several players who are; the

Government, Issuers, Investors as well as the financial services regulators (NSE, 2016).

1.8.4 Efficient Market Hypothesis (EMH)

This is a finance theory contending that the stock/financial market incorporate news and

the same reflected in the share prices such that it is extremely difficult for one to gain

abnormal profits by holding certain information (Doran and Nachtmann, 2013).

1.8.5 Stock Liquidity and Volume (SLV)

Liquidity is the ability to trade a certain volume of shares at prices which are close to the

price and volume of the previous trade (Galariotis and Giouvris, 2014). Stock volume on

the other hand pertains to the quantities of shares traded per unit time.

1.8.6 Share Price

Share price is the price of the shares of companies trading at the stock exchange (Mibe,

2010)

1.8.7 Public Quoted Firm

Publicly quoted firms are companies whose shares are traded on a stock exchange (Collins

dictionary, 2010)

1.9 Chapter Summary

The chapter discussed background of the study, problem statement, research objective,

research questions, significance of the study, scope of the study, and definition of terms.

Chapter two presents literature review based on the two research questions. Chapter three

presents research methods that was used in the study. Chapter four presents results and

findings. Chapter five covers discussions, conclusion and recommendations.

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CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter reviews the accessible literature identified with effects of stock split

announcements on stock prices of public quoted firms in Kenya. It covers hypothetical

establishment of the study, asset reliance hypothesis, asset based hypothesis. The review is

based on the research questions: Do stock split announcement result in an increase or

decrease in share price of public quoted firms in Kenya? What is the effect of stock

announcement on the stock volumes of public quoted firms in Kenya?

2.2 Effect of Stock Split Announcement on Stock Prices

2.2.1 Stock Split Announcement and Investors’ Future Earnings

Chen and Gao (2012) sought to examine whether stock dividend announcements produced

value for companies traded on the Nigerian stock market and to determine the nature of the

information such announcements convey. A standard event study methodology, employing

the market model, was adopted to determine the abnormal returns both on and surrounding

the stock dividend announcement date. A test was presented in light of the planning of

announcements and on the recurrence with which the reporting companies ‘shares were

traded.

The experts additionally concentrated the data substance of stock profits by utilizing the

chi square strategy to test the level of relationship between money profits, income and stock

profits. The discoveries showed that organizations that pick their own particular

announcement date outside the Nigerian stock trade announcement window encounter

positive strange returns if their stock was all the more much of the time traded and negative

irregular returns if their stock is less as often as possible traded Chen et al. (2012).

Furthermore, support was found for both the money substitution speculation and the

flagging theory as clarifications for the data stock profits pass on to shareholders.

Louhichi (2013) looked to focus both the data substance of bookkeeping figures and the

speed at which the new data is joined into stock costs. The sample was made out of 117

overnight announcements distributed by Reuters during the period 2001-2013. For each

date, the event was ordered into one of three classifications: awful news; uplifting news or

10

no news. The paper utilized intraday event contemplate philosophy to look at market

response just before and soon after the occasion. The intraday examination unveiled a few

outcomes.

There is a sizeable measure of empirical proof connecting stock split announcements with

anomalous stock value execution. The vast majority of this confirmation demonstrates that

ideal stock split (profit increments) are connected with positive stock value response, while

ominous stock split (profit declines) are connected with troublesome response to stock

costs. This market events perceived as "the data content speculation" or "the profit flagging

theory" or "the stock split announcements impact", and it is grounded on Miller and

Modigliani's (2016) suggestion that profits may transmit new data to the market, if

supervisors have prevalent data than financial specialists in regards to the organizations'

future prospects (data substance of profits speculation or profit flagging theory).

Consequently, as affirmed by Ambarish et al., (2013), a profit increment or decline passes

on great or awful news to the market and results in an upward or descending value response.

Various researchers have explored the data substance of stock split announcements and

have verified the finding of Fama et al.(2011) that offer costs respond to the flagging

substance understood in stock profit announcements, which they allude to as the flagging

speculation (Balachandran et al., 2014; Grinblatt et al., 2013; McNichols and Dravid,

2013).

Elfakhani and Lung (2013) looked at the data substance of stock profit announcements in

the United States from 1967 to 1976 and inferred that directors passed on positive private

data concerning future income to investors through stock profit announcements. Be that as

it may, administrators stopped from stock profit announcements when future income were

uncertain, so as not to flag negative data to speculators. Subsequently, the flagging theory

is a standout amongst the most captivating portrayals, among others, for the stock trade's

reaction in connection to stock profit announcements.

The money substitution speculation recommends that organizations issue stock profits as a

transitory substitute for trade profits out request to protect their money holds. Empirical

reviews give some deficient support to this speculation. For instance, Ghosh and Woolridge

(2014) found that a negative securities trade response to profit cuts and oversights by US

firms could be remunerated or diminished by announcement of a stock profit as an assistant.

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Broker et al. (2013) examined the stock trade response to firms in the USA that ended

money profits while keeping up their current level of stock profits. They found a positive

(albeit factually inconsequential) abnormal return following such announcements.

Separately, while studying the Chinese stock market reactions, Chen et al. (2002) provided

some evidence that stock dividends appear to be favored over cash dividends.

2.2.2 Stock Price Adjustment to Announcement of New Stock Split News

The presence of positive abnormal returns around the stock split announcement that is

found in many empirical studies: Ikenberry et al. (2014); Mukherji and Walker (2013) and

Ikenberry and Ramnath (2012) provides evidence for the signaling hypothesis. Ikenberry

et al. (2014) examine the market reaction to split announcements by computing five day

market-adjusted returns from two days before to two days after the announcement. Market-

adjusted returns are calculated by subtracting the five-day holding period return on the

Center for Research in Security Prices (CRSP) value-weighted New York Stock

Exchange/American Stock Exchange (NYSE-ASE) portfolio from the five- day holding

period return for the splitting firms. They assess significance levels using cross-sectional

standard errors. The results support the hypothesis that, in addition to bringing share prices

back into a trading range, splits also serve as positive signals to the market about higher

future returns.

Mukherji and Walker (2013) investigate a broad sample of stock splits by firms without

confounding events, controlling for industry and size effects. Their results show that stock

splits increase the numbers of both individual and institutional shareholders, and they do

not affect the proportion of equity held by institutions. They present that abnormal

announcement returns are positively correlated with changes in the total number of

shareholders. These findings support the signaling hypothesis. Ikenberry and Ramnath

(2012) test the under reaction hypothesis of the market using a self-selected event that a

company can choose to engage in - a stock split - to examine the sluggish revision in stock

split expectations. Using control firms matched on the basis of market capitalization,

value/growth, momentum and nominal share price, they present a buy-and-hold abnormal

return of 9% in the year following the announcement for firms announcing stock splits. The

positive drift suggests that stock split has signaling effect.

Contrary to above argument, Kadiyala and Vetsuypens (2012) in their study of changes in

short-interest positions around stock splits posit that positive stock volumes at split

announcements cannot distinguish between signaling and liquidity effects. They argue that,

12

whenever the event that conveys a positive signal also causes contemporaneous liquidity

improvements, stock volumes are less useful for testing signaling theories. There is no

ambiguity for short interest. They argue that short interest should decline if the event

conveys a positive signal as short traders respond to this signal by reducing their short

position in the firm. On the other hand, liquidity-enhancing splits should cause an increase

in short interest. Short traders are exposed to two significant transaction costs: the

opportunity cost of the margin that must be posted by the short seller, and the exposure to

a "short squeeze." A short squeeze occurs when institutional investors take large positions

in already heavily shorted stocks and then request delivery of the shares.

This transaction reduces the liquidity of the shares and forces a premature closing out of

the short position. Thus, short interest represents an appealing metric to test for signaling

effects. They present weak evidence that stock splits convey a positive signal.

Brennan and Copeland (1988b), McNichols and Dravid (2011), and Brennan and Hughes

(2012), linked the positive stock market reaction to share split announcements to managers

giving a signal of better times ahead. Brennan and Copeland (1988b) came up with a model

of share-split behavior in which the split serves as a costly signal of private information by

managers because shares trading costs depend on stock prices. They present empirical

findings confirming the relation between stock trading costs and share prices. The signaling

model is estimated using a large sample of splits and explains a substantial fraction of the

split-announcement returns.

McNichols and Dravid (2011) conduct three tests of the hypothesis that managers signal

their private information through split factor choice. Their tests of the signaling hypothesis

rely on the notion that managers prefer their firms' shares to trade in a certain price range.

They document the split factors are increasing in pre-split share prices and decreasing in

the pre-split market value of equity. The first relation is consistent with the notion that firms

split their shares to bring them into a specific range, and the second is consistent with the

idea that larger firms prefer a higher trading range. Signaling explanations are consistent

with abnormal increases in stock split and/or dividends around the split.

Lamoureux and Poon (2015) present that a split affects several variables, each of which is

related to liquidity. First, (explicit) transactions costs are increased by a split. On the other

hand, their analysis indicates that splitting stocks have a wider ownership base following

the split and also an increase in the number of daily transactions post-split.

These two effects may serve to increase a stock's liquidity post-split. They posit the most

telling measure of the degree of liquidity is dollar value of shares traded per unit of time.

13

Using this as a measure, they conclude that splits induce permanent reductions in liquidity.

A stock split increases liquidity as it lowers the nominal share price, which lowers the cost

of a round lot of stock. There is increased number of new shareholders being attracted by

the lower share price. Larger volume due to a greater number of shares traded tends to

attract broker/dealer attention, which in turn attracts additional investor attention (Angel,

2015).

Leung et al. (2013) did a study to analyze the impact of share splits by using data on intraday

as well as insider trading data in Hong Kong market from 1980-to-2000. They found

significant abnormal returns around the share split announcement which they attributed the

positive reaction to favorable signals and improved the liquidity of the shares.

2.2.3 Trend Before and After the Announcement of New Stock Split News.

Kipronoh (2014) did a study to examine the response to stock market on share split

information releases by use of daily price data from the NSE From 2012-to-2013. The event

window will be set for 90 days; 45 days before the stock split which is the event, and 45

days after the event date with the event date being denoted by 0. The review utilized the

philosophy of event contemplate to test responsiveness of costs to income data releases

given a sample of five organizations in the NSE 20-share list. There will be proof of critical

strange value response around the income announcement periods recommending that profit

announcements do contain significant data. It was found that irregular returns appeared to

overwhelm 25 days before the date of income release recommending that there were no

broad responses seen in the market. The progressions apparent just were credited to a

couple of people who may have been having private and insider data. There was however

a float in the aggregate strange returns, 25 days after the declaration, which negates the

proficient markets theory proposing that Nairobi securities showcase, does not productively

change costs to profit data in view of the tested firms inside the two year time of study. The

accompanying hypotheses attempt to clarify the impact of profit announcement on

combined stock costs.

In the created markets, many reviews have been directed to test the effectiveness of

securities trades as for corporate event announcements. Be that as it may, just not very

many reviews have been directed in creating nations. A portion of the select reviews

important to the semi-solid productivity are audited here-after: Biais (2013) investigated

the response of the Trading Volume Activity (TVA) and Security Returns Variability

(SRV) to yearly income announcement with a sample of 143 New York Stock Exchange

14

(NYSE) firms. The outcome showed 33 rate increments in TVA and 61 percent expansion

in SRV in profit announcement week over the non-announcement weeks. A review by

Lakhal (2015) found that the arbitrary walk speculation suggests that the value

developments are for all intents and purposes autonomous of past value development. The

review uncovers that the irregular walk speculation might be off base or, at any rate

fragmented.

Mugenda (2013) in her paper on the modification of stock cost to half yearly income

announcement in India, considered 33 securities which performed well. Obaidullah (2013)

detailed that profit demonstrated an expanding pattern much before the announcement

week. Solid (2012) investigated security value conduct related with rights issues related

occasions and gives confirm on corporate capital structure, capital market effectiveness and

event examine approach. The creator reasons that a rights issue of value is viewed as „bad

news by financial specialists and a rights issue of completely convertible debenture (FCD)

is viewed as neutral' news.

Fama (2015) presented confirm on the way of the profit data passed on by stock splits

during 1982-1989; a time of lower swelling and higher genuine financial development.

Comes about for 1982-1989 show that the market translates stock splits as signs of resulting

profit increment. Dann et al.(2016) did a study on efficiency of the market and found out

that EMH remains elusive but simple in principle. It is very hard to profit from just the

most extreme violations of market efficiency. The EMH model continues to provide a

framework that is widely used by financial economists.

It appears that reasons for a stock split by low priced companies could be explained

by neglected firm hypothesis, which seems, by all accounts, to be substantial for the Indian

securities exchange. Sponholtz, (2014) investigated the data substance of 580 yearly profit

announcements of 197 firms in the period 1966 –1970. The sample choice criteria were

predictable to that utilized by Beaver (1968). The measure of data substance was the

remaining return. Sponholtz considered the extent of the leftover return and not the course.

After broad analysis of the residuals, Sponholtz reasoned that the yearly income of firms

tested have no data content. In his words "regardless of the possibility that the yearly

income reports of the tested firms do have data content, the remaining fluctuation data

15

measures are not equipped for catching it. At the end of the day Sponholtz propose that

Market Model may not be proper for the sample of firms he chose.

Be that as it may, Sponholtz's decisions could be related with the organizations in the

example. Since data is accessible from different hotspots for instance interval reports,

profits, rewards and other goofy announcements, unless these different sources are

controlled, yearly income report may swing to have no data content. Morse (1981) utilizing

a sample of 25 NYSE/ASE stocks and 25 OTC stocks in the period 1973 –1976,

investigated the conduct of both the trading volume action and security return

changeability. Morse detailed both expanded trading volume action and expanded

fluctuation at the season of profit release for both examples. Instead of Grant (1980), more

detailed no critical contrasts between NYSE/ASE and the OTC samples for both measures.

A conceivable explanation behind this could be the way that Morse's OTC sample was

drawn from a population of actively traded securities. All the same the study shows that

stock split release for both OTC and NYSE ASE firms have information content.

2.3 Effect of Stock Split Announcement on Stock Volumes

2.3.1 Stock Split Announcements and Trading Volumes

Dasilas et al. (2012) sought to empirically investigate stock price and trading volume

reactions to synchronous between time profit and income announcements by the Greek

firms quoted on the Athens stock trade (ASE). The traditional philosophy for event studies

was locked in to test the response of the offer cost and trading volume in connection to the

announcements on interval profits and income. Comes about affirmed the flagging

speculation which predicts positive market response to the joint announcements on profit

and income.

In any case, the size of the value reaction started by the last profit announcement appeared

to be higher than the one by the interval split announcement. Lakhal (2015) looked to

inspect whether non-ordered income revelations incorporate esteem important data and

influence data asymmetry and securities exchange liquidity. The event think about

procedure investigates the educational substance of terrible, unbiased and great deliberate

profit releases. The OLS board relapse structure was then used to break down data

asymmetry and securities exchange liquidity ensuing to both classes of deliberate profit

exposures (i.e. profit estimates and quarterly income exposures).

16

Empirical tests demonstrated that willful income revelations included material data and that

terrible news was released in a troublesome manner prompting data spillage in the pre-

announcement period. The outcomes moreover showed that quarterly profit upgraded

securities exchange liquidity by contracting offer ask spreads. Be that as it may, income

conjectures bothered data asymmetry previously, then after the fact the announcement date.

This outcome affirmed the presence of data spillage and recommended that administrators

have extensive prudence whether to make a conjecture, and in choosing its frame, timing

and specificity.

The liquidity speculation recommends that the production of extra shares ought to prompt

an expansion in trading and more noteworthy possession scattering, in this manner

enhancing liquescency. In any case, in their examination of changes in trading volume

after stock profit announcements during the period 1963-1982 by firms quoted on the

NYSE and the AMEX, Balachandran, at al (2014) found that while trading volume

expanded in the month when the announcement was made, this ascent in volume did not

proceed. Lack of proof for the liquidity speculation is additionally revealed in

Balachandran, at al (2014) for Danish stocks.

In the contrary, be that as it may, an analysis done on splits in the Canadian market between

1973 and 1992 by Leung, and Wang, (2016) came up with a finding that both trading

volumes and stock split increased, post-split. Another study done by Lyroudi and Dasilas

(2006) of firms quoted on NASDAQ in the year 1999-to-2000 found evidence of a positive

market reaction to share split announcement consistent with the liquidity hypothesis.

2.3.2 Effectiveness of Stock Split Announcement on Stock Liquidity

In Dow and Grover (2001) evaluated the effectiveness of information technology

investments. In this study, the researcher examined the adjustments in the market value of

the firm as reflected in the stock cost in light of IT speculation announcements. Responses

of cost and volume were contrarily identified with firm size and turned out to be more

positive after some time. Jijo and Rao (2002) in their review, "Market Reaction to Stock

Splits' investigated the response of stock costs around the date of announcement of stock

splits and ex-split date.

On the declaration day, there was a return of 5.3% and on day +1, 2.42%. The after effect

of irregular returns around the ex-split day which demonstrates that a great split of the

17

anomalous profits did occur for day 0 at 3.68 percent and day +1 at 2.04percent. Ghosh and

Woolridge (2014) did a researcher on stock splits and liquidity on account of the NASDAQ

- 100 and came up with a finding that the normal day-by-day turnover before the split was

approximately 24% and after the split the same came down to 22.81 percent. A "t" test for

distinction in mean neglected to dismiss the theory that the turnover before the split (the t-

measurement is 0.8) looking at the quantity of merchants prior and then afterward the split.

It is evident that there was somewhat less than twice the same number of merchants after

the split than some time recently. A review on Market response to securities exchange parts

in India by Ghosh and Woolridge (2014) keeps up that stock splits are related with positive

irregular returns around the declaration. All things considered parts are found to enhance

the trading volume of shares and there was increment in the daily number of traders. But

they do not increase the daily turnover and consequently the liquidity of stocks in India. At

the end, the author concluded that the majority of shares which underwent split were trading

at low market prices.

Harish (2007), took a closer look at share split as an event while studying the efficiency of

the Indian market. He did a study on the total strange returns of stocks, which have gone

for stock splits for the time of study attempted. The outcomes demonstrated unusual returns

during both the pre and post stock splits were measurably not as huge to prompt a

conclusion that semi-solid type of effectiveness do not exist in the Indian securities

exchange. Dhar et al., (2014) have analyzed the impacts of stock splits and reward issue on

the Indian securities exchange.

Additionally, the review has also concentrated the way of productivity of Indian securities

exchange. The outcomes have demonstrated that both the occasions are related with

essentially positive announcement impact. For the stock splits, the unusual returns are 0.8

for each penny and the paper has discovered semi-solid shape proficiency in the Indian

securities exchange. John and Williams (2015) have considered cost and liquidity impact

related with stock split encompassing its declaration.

The outcomes have demonstrated that there is critical positive unusual return related with

stock split, however it switches in only a couple days after the event day and produces

noteworthy negative anomalous returns in a somewhat longer post event days. Taking

everything into account, a stock split does not positively affect the abundance of the

shareholders and just enhances liquidity of the stocks.

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The scholars have analyzed the elements, which impact stock split choices in Indian setting.

The review has taken a sample of 50 organizations quoted in BSE (Bombay Stock

Exchange) during the period 2007. Combined example "t" test was utilized to focus the

adjustment in the Profit after Tax (PAT), volume of exchange and Foreign Institutional

Investors (FII) possessions before and post stock split date. Comes about have

demonstrated that there is emphatically noteworthy change in the benefit after expense,

volume of trade and FII possessions amongst pre and post-split date.

A multiple relapse model was developed and the outcomes have demonstrated that Price

of shares (5 days before stock split) and volume of trade are the components affecting stock

split choices in Indian securities exchange, along these lines showing that organizations

with very valued shares split stocks to build volume of trade. However, there is huge change

in the PAT between the pre and post stock split period, this element has impacted the stock

split choice, in this manner dismissing the theory that stock splits signals enhanced future

profit of the organizations. Liquidity theory and trading range speculation are holding

useful for the Indian securities exchange (Sriram et al, 2010).

Ranjan et al., (2013) attempted to focus the purposes behind firms offering value ensuing

stock splits. They have found no distinction in returns between firms issuing value after

stock splits and non-stock split firms during the issue time frame. Since financial specialists

respond emphatically to stock split announcements, firms issuing stocks will offer their

new issue at a higher cost and raise more subsidizes. The creators have additionally found

that organizations split stocks to make their consequent value shares more attractive to the

financial specialists who are pulled in by the low estimated shares.

2.3.3 Effects of Stock Split Announcement on the Cost of Stock Volumes

Savitriet al., (2015) investigated the effect of stock split on stock profit and trading volume

for Jakarta Stock. Trade between 2001-to-2005. The review has examined anomalous

returns and volume during the period around the split and has related stock comes back to

productivity, use and volume. It is reasoned that there are noteworthy strange profits for

19

the date of split on the fifth day before split. Trading volume and profit for resource have

huge impact on market-balanced returns. Katerinaet al., (2016) showed that the market

response to stock split announcements is certain, which infers the supervisors and financial

specialists see the stock split as an uplifting news event with respect to the organization.

The outcomes are steady with trading extent and liquidity theory. Liljeblom, (2013)

examined the heartiness of the outcomes acquired for the conceivable inspiration for quoted

firms in the Spanish Market 170 to execute a stock split utilizing diverse philosophies.

Grossman (2016) gave a confirmation on share split announcement that there was no impact

on the announcement related with share splits in the Indian market, never the less there

existed an articulated ex- day or after split effect. There was also no evidence found for the

trading range as a possible explanation for stock splits in India, with most of the shares

which underwent a split being traded at low market prices. Therefore it appears that reasons

for a stock split by low priced companies could be the neglected firm hypothesis-, which

appears to be valid for the Indian stock mark.

Many reviews embraced in different securities exchanges on the globally created blended

outcomes. In a large portion of the reviews, stock split announcements elicited positive

outcomes. For example, Woolridge (2013) completed an examination on market response

to stock split in the German market and discovered overabundance returns during the initial

four days taking after the split declaration. A few reviews found that business sectors

responded contrarily. Grossman et al. (2013) noticed that organizations that split their stock

experienced declining liquidity inside the initial 9 to 12 months. Grossman et al. (2013)

discovered declining trading volumes after Stock splits. Others school of thought observed

that there was no impact available when stock split announcements were made. Gupta and

Kumar (2007) found that there was no impact available related with Stock splits.

This instability about the genuine impact of stock splits announcements on stock costs is

the primary motivation behind why the scientist expects to embrace this review. Munyao

(2012) concentrated ten firms in the NSE that have led stock splits and found that one firm

had its offer cost unaltered, three firms' offer costs diminished though four firms share costs

expanded.

In addition, the greater split of the reviews that have been attempted on stock splits were

done outside the Kenyan market. The reviews done in Kenya have been excessively few,

20

making it impossible to give a convincing outcome and henceforth the need to do this

examination. Mohamed, (2016) found that the idea of stock splits was generally new in the

Nairobi Securities Exchange, with the main split regularly having happened in the year

2004. All things considered, very little research has been done in the neighborhood

showcase. Moreover, market reaction elicited by stock split announcements as shown by

studies done in other countries cannot be generalized to the Kenyan market because of

differences in stock market activity, varying economic growth levels, diverse political

environments, among others Mugenda and Mugenda, (2013). Hence, there exists a gap.

2.4 Conceptual Framework

A conceptual framework is an essential research tool intended to assist a researcher to

develop awareness, understanding and communicate the situation under scrutiny (Maina,

2012). It is very useful in research as it sets the foundation of how concepts are related. It

explains, graphically or in narrative form, the main dimensions being studied, or the

presumed relationships among them. It is derived from theory to identify the concepts

included in the complex phenomena and show relationships.

The relationship among the various variables in the study is as depicted below

Independent variable Dependent variables

Stock split announcement Change in stock price

Change in stock volumes

Figure 2.1: Conceptual Framework

Stock split announcement – This entails the communication of the intention to divide a

share

Change in price – A rise or fall in the share price

Change in volumes – A rise or fall in Share volumes

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2.5 Chapter Summary

The chapter covered introduction to literature review and the effects of stock split

announcement on stock prices and stock volumes. Chapter three described research

methods and procedures that was used in the study. Chapter four presents results and

findings. Chapter five covers discussions, conclusion and recommendations.

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

The chapter discussed the research methodology employed in the study. It detailed the

research design, the population studied, the sample and sampling methodology used, the

nature of the data collected and the data presentation.

3.2 Research Design

This study adopted a descriptive research design of quantitative data collection method

which allows collection of information from the entire population. The descriptive research

design seeks to provide the frequency of a given event and it is usually used when the

22

problem is clear and there exist theories and information. This research design was chosen

because the study looks into the relationship between stock splits announcement events and

stock changes in terms of price and volume.

3.3 Population and Sampling Design

3.3.1 Population

According to Lyroudi and Dasilas (2016) a population is the full set of cases from where

the sample is taken. The population needs to have some common observable characteristics

altogether. The target population for this study comprise of quoted firms which announced

splits from the year 2009 through to 2016.

3.3.2 Sampling Design

3.3.2.1 Sampling Frame

The sampling frame is an objective list of the population from which the researcher can

make his/her selection. A sampling frame should contain a complete and up to date list of

all that comprise the population for the research (Uddi, 2015). The sampling frame in this

study constituted all quoted firms in the study period that met the following conditions:

been a quoted company during the period 1st January, 2009 through to 30th December,

2016; be a quoted company; have announced at least one final dividend during the period;

must have at least 45 days pre and post announcement price and volume data.

3.3.2.2 Sampling Technique

Census technique was used while sampling the research data. A suitable sampling frame

and the actual sample size required were established then the most appropriate sampling

technique selected. In this study, the entire sample frame was be taken.

3.3.2.3 Sample Size

According to Sekaran and Bougie, (2010), Sample size is the number of respondents to be

studied. Sample size should neither be too large or small but it should be realistic enough

to give a confidence interval of desired width (Kothari & Garg, 2014). The study used all

quoted firms in the study period that met the following conditions: been a quoted company

during the period 1st January, 2009 through to 30th December, 2016;

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3.4 Data Collection Methods

Secondary data was used to collate data. Data included; share price; stock index (NSE 20

Share index); stock volume and stock split announcement dates from 1st January 2009 to

30th December, 2016. This information was obtained from NSE and CMA. Data was

collected through the use of structured data collection sheet from the NSE database and

hard copies sent to CMA. Through this, the researcher was able to collect data that would

address all the study objectives. The checklist below was used

Data checklist

COMPANY DECLARED Split FactorANN'CED CLOSURE

EQUITY BANK SHARE SPLIT 1:10 February 12, 2009 March 25th,2009

KENOLKOBIL SHARE SPLIT 10:1 May 20, 2010 June 1st,2010

BARCLAYS SHARE SPLIT 01:40 February 22, 2011 May 30th,2011

ATHI RIVER MININGSHARE SPLIT 05:10 May 14, 2012 January 7th,2013

CARBACID SHARE SPLIT 01:50 October 23rd,2013 November 15th,2013

LIMURU TEA SHARE SPLIT 01:20 May 12th ,2015 June 25th, 2015

NATION MEDIA GROUPSHARE SPLIT 04:10 March 18th,2012 July 25th, 2012

CMC HOLDINGS SHARE SPLIT 09:20 January 11th, 2009 February 26th,2009

SASINI SHARE SPLIT 07:30 December 18th,2012 February 14th,2012

EABL SHARE SPLIT 07:30 August 27,2009 November 26th, 2009

EAST AFRICAN CABLESSHARE SPLIT 09:20 August 10,2011 September 4th, 2011

3.5 Data Analysis Methods

Statistical Package for Social Science (SPSS) was used as an aid in the analysis. The

researcher prefers SPSS because of its ability to cover a wide range of the most common

statistical and graphical data analysis and is very systematic. SPSS will be used to create

showcase returns, irregular returns and volumes and factual qualities to test noteworthiness.

By and large an event study has four stages. The underlying errand of directing an event

study is to characterize the event of intrigue and distinguish event window (- 45 to +45)

and control periods/pre and post event window periods (- 45 to-45 and 22 to 43); value of

factors in the event window and control period. Computation of the unusual split (cost and

volume). This last stage is equivalent to the esteem of the variable in the event window

minus the value of the variable in the control period. Finally, a test will be conducted to

establish if the component is statistically significant (Louhichi, 2015).

24

3.6 Chapter Summary

The chapter covered introduction to the research methodology, research design, population

and sampling design, data collection methods, research procedures and data analysis. The

next chapter presents the results and findings of the study.

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

The objective of this study was to investigate if stock split announicement result in change

of share price of public quoted firms and the effect of stock split announcement on the stock

volumes of public quoted firms at the Nairobi Securities Exchange for the period 2009 to

2016.

4.2 Descriptive Statistics

Based on the table below, the highest split factor of 11 in 2016 followed by 9.2 in 2015.

2012 recorded the lowest split by an average of 5.3. Similarly, 2016 had the highest number

of splits given that 4 companies conducted stock splits. The study considered the event

window of 90 days consisting of t-45 to t+45 of 20 in Nairobi Securities Exchange

Table 4.1: Descriptive Table

25

Equity Kenol Barclays Athi River Carbacid NMG Sasini EABL

Mean 15.35 9.45 16.35 43.01 24.81 181.14 11.79 143.55

Standard Error 0.14 0.11 0.09 0.23 1.12 1.55 0.09 0.49

Median 15.75 9.86 16.50 43.40 19.47 183.86 11.71 142.01

Mode 13.93 9.77 14.29 45.40 18.67 180.00 12.49 150.00

SD 1.34 1.05 0.87 2.20 10.67 14.78 0.84 4.70

Kurtosis 1.79- 0.96- 0.16 0.86- 4.19 0.35- 1.24- 0.32-

Skewness 0.05 0.67- 0.71- 0.18- 2.12 0.60- 0.15- 0.85

Range 3.80 3.45 3.61 10.00 50.04 60.98 3.24 17.89

Minimum 13.65 7.49 14.25 37.00 17.33 145.37 10.03 137.00

4.3 Normative Test

This study defined the period to be studied (2009 to 2016) and determined the exact day of

announcement of the earnings and made this day zero. In this research 45 days before the

announcement and 45 days after the announcements was define as the event window and

the returns of the window were used to compute daily abnormal positive or negative returns

for all firms under investigation. Daily returns was calculated by using models mentioned

in the research methodology to find out actual daily returns and were compared with

estimated daily market returns for the same period to ascertain if there were abnormal

returns for each day during the 45 day event window. The research expected that the

magnitude of the effect of stock split announcement to vary across the firms because such

announcements made by the firms indifferent industries at different times. In which case,

it is useful examining individual firm behavior.

From the table ,The mean, Mode and median were as indicated in the table with no major

deviations for each company apart from Carbacid and Nation media Group which had a

standard deviation of 10. And 14.7 which owed to the high share prices before the split.

The data was normally distributed for all the variables as revealed by the skewness levels

which all were near zero.

As per the data, the kurtosis results indicate the data was within the same range and

normally distributed.

Analysis of the findings was done using Microsoft Excel and SPSS. Excel was used

in the data compilation while SPSS was used for final statistical data analysis. Also,

parametric t-test was used to determine the statistical significance of market adjusted

26

average investors’ return; and stock volume of stock split announcement over the window

period (-45 day to +45day relative to earnings announcement).

4.4 Change of Share Price

Table 4.2 presents the t-test results for Change f share price from 45 days before and 45days

after announcements for the listed companies. The result shows that the change in share

price is statistically significant at the 5% level: p value 0.001258 < 0.05.

Table 4.2: T-test Paired Two Sample for Change of Share Prices

Factor Price

Mean 0.155909

Mode 0.144700

Median 0.143757

Variance 0.063006

Std Deviation 0.06

Observations 13

Pearson Correlation 0.10128

Hypothesized Mean Difference 0

Df 42

t Stat 3.458378

P(T<=t) two-tail 0.001258

Price reaction to announcements using daily stock prices around the announcement dates

is consistent with findings by Onyangoh (2014); Maina (2013); and Mohamed (2013) but

contrary to Ondigo (2015).

The results of the study show that the stock split announcement contain relevant

information to affect prices of shares which are fully impounded in change of stock prices

prior to or almost instantaneously at the time of announcement. Secondary evidence

resulting from this study is the conclusion that NSE shows presence of semi strong model

of EMH. This is contrary to early evidence adduced by the study of Ondigo (2015).

4.5 Average Stock Volume

Average Stock Volume from 45 days before and 45 days after announcements for the

earnings announcing firms. The event being studied is the stock split announcement and

27

their effect on share prices and stock volume. The study therefore examines the returns

before and after the stock split announcement. The day of announcement is denoted as day

zero.

This section is a presentation of detailed data analyses that was carried out and includes the

findings of the research. The study sought to investigate the effect of stock split

announcement of listed firms. The model: Pit –Pit-1 / Pit-1 was used to determine the actual

daily positive/negative abnormal returns (Rit). Thereafter, the notation: Iit –Iit-1/Iit-1 to

calculate daily expected market returns (Rmt). The expression: Rit–Rmt was finally used

to calculate the positive or negative abnormal returns. The results from MAAR provided

the empirical evidence regarding the relationship among returns and were further tested at

the 5% level of significance to ascertain if the differences were significant.

Daily NSE 20 share index price chosen to be the yard stick for abnormal return either

positive or negative. NSE 20 share index price is the share price of selected listed twenty

firms in case a firm is suspended another one selected by following the selection criteria.

The findings from table 4.3 of variables value of 0.002419<0.05 at the 5% level of

significance indicates that there is a significant difference between stock and market returns

during the window period. This implies that the announcement of earnings normally carries

surprise to the market. It is also worth noting that there is existence of both negative and

positive returns which could be reflective of good and bad signaling from the stock split

announcement. These results strongly suggest that the effect of stock split announcement

is strong in Nairobi Securities Exchange.

Table 4.3: T-test Paired Two Sample for Average Stock Volume (ASV)

Factor Volume

0.019613

Mean 0.004854

Mode 30

Median 27

Observations 42

Pearson Correlation 0.126033

Hypothesized Mean Difference 0

Df 41

28

T Stat 3.233155

P(T<=t) two-tail 0.002419

EABL stock split was conducted in 2011 and as observed from the figure 4.2 share price

reacted sharply both in pre and post stock split for the company. It took 20 days for the

share price to regain its value after the split

For CMC holdings, there is no increase in share price before the stock split a finding by

Angel (1997) Stock splits have zero impact on a firms value and are meant to keep the

shares of the company within an optimal range to make it affordable and hence increase

liquidity. This is evidenced by the increase in the share price of CMC after the split where

the price increases majorly as a reaction to demand and supply of the market forces.

KCB share split had a minimal impact on the share price movement an indication that stock

splits have no impact on share price.

Nation group share prices rose steadily during the pre and post-split period -45 to +45.This

means that share split had no effect which can be used to conclude that the market is

efficient and news are absorbed in the market effectively which in other words is referred

to as information Asymmetry.

KenolKobil is seen as sensitive in both pre and post-split. A decrease is observed before t0

which could be attributed to panic among shareholders and investors as to the reason of the

split. The increase after stock split could be again pegged to confirmation that the news

spread alluding to the split were false and the obvious affordability of the shares

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Figure 4.1: Reaction of Share Price to Share Split Announcement

4.5 Chapter Summary

This chapter reports the findings of the study highlighting the findings for each

study question. The effects of share split announcement on stock prices and stock prices

respectively. Chapter five provides the conclusion, summary as well as the discussions and

the recommendations.

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CHAPTER FIVE

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter discusses the findings of the study, recommendations from the study

are then given, limitations of the study are then discussed, and finally suggestions for

further research are given.

5.2 Summary

The general objective of this study was to examine effects of stock split announcements on stock

prices of public quoted firms in Kenya. The purpose of this study was to establish the effects of

stock split announcement on stock prices of public quoted firms in Kenya. The study was

guided by the following research questions; does stock split announcement result in change

of share price of public quoted firms in Kenya? and What is the effect of stock split

announcement on the stock volumes of public quoted firms in Kenya?

Descriptive research design was used. This is because descriptive research design seeks to

provide the frequency of a given event and it is usually used when the problem is clear and

there exist theories and information. The target population comprised of quoted firms which

announced splits from the year 2009 through to 2016. Secondary data was used to collect

data from NSE and CMA. Data was collected through the use of structured data collection

sheet from the NSE database and hard copies sent to CMA. Statistical Package for Social

Science (SPSS) was used to analysis data.

The mean adjusted model was used to do the analysis with the results being tested for

significance using a t-test. The Market Adjusted Abnormal Returns were found to be

significant by having a p value of 0.002419 < 0.05 at the 5% significance level which

indicated that there is a significant difference between individual Shares and the market

volumes during the window/study period. The findings indicated that individual Share

prices of firms react to stock split announcement. The study also found Cumulative

Abnormal Returns to be statistically significant at the 5% level with a p value 0.001258 <

0.05 indicating that there is a significant difference between cumulative Shares and market

volumes during the window period. The findings indicated that cumulative Share prices of

firms react to stock split announcement.

31

Finally, the study paradoxically found that Share volumes were statistically insignificant at

the 5% level with a p value 0.459772 > 0.05. This meant that Share volumes were not

significantly affected by stock split announcement and did not instantly react to earnings

announcement.

5.3 Discussion

A discussion based on the study research objectives in comparison to the literature review

will be provided in this section. This section interpreted the results in respect to the two

research questions.

5.3.1 Effect of Earning Announcement on Share Prices

There was unpredictability with positive returns on some days and negative on some others.

The scenario points to the existence of Random Walk Theory whereby prices are

unpredictable; whereby chartists cannot make abnormal returns. According to Fama

(1970), a Random-Walk market is a market where successive price changes in individual

securities are independent.

This implies that a series of changes in Share price is not pegged to the past history

of the series and neither can it be used to predict the future in a meaningful way.

If the successive price changes for any given security are independent then there is no

problem in timing purchases and sales of a security.

The elementary assumption of the chartist or technical theories is that history is

likely to replicate itself implying that past trends of price behavior in individual

securities will probably recur in the future. Consequently, the manner to forecast Share

prices and to hopefully increase their potential gain is to cultivate awareness with

historical patterns of price behavior so as to spot conditions of likely recurrence.

Even though the processes generating Share volume may be modeled as a random walk

if capital markets are efficient, investors might expect a general drift in volumes; that

is, one might expect that investors will earn a "normal" volume on their securities. The

existence of positive and negative returns on alternate days is indicative of fairly fast

adjustment of prices. This sign shows that the Nairobi Securities Exchange is a semi

strong in terms of capturing new information and price pattern predictability. When

a market is semi strong, prices of Share reflect publicly available new information rapidly

32

in an unbiased fashion such that no excess volumes can be earned by trading on that

information for example the announcement of annual earnings, Share splits among others.

The meaning of this is that neither fundamental analysis nor technical analysis techniques

will be able to reliably produce excess volumes. When the market is semi strong, chartists

hardly benefit from events like earnings, dividend, Share split, merger, etc. announcements.

This scenario is reflective of a fairly efficient market where prices adjust fairly fast

enough and thus Share prices remain reflective of market fundamentals.

Market efficiency is a condition whereby all publicly available information is reflected in

the share price making it difficult for an investor to gain abnormal returns by exclusively

trading on the information. The sole assumption in this market is that buyers and sellers are

rational and information is free. Competition is expected to drive all the information

quickly enough into the market. (Capital Market Efficiency, 2014).

5.3.2 Effect of Earning Announcement on Stock Volume

The findings of this study indicates that stock/share volumes did not react quickly enough

to share split announcement. This is contrary to several similar findings on the same

subject matter with specific focus on volumes. This can be variously explained but one

possible explanation is that investors take time to watch price movements before

offloading or increasing their Shares.

The results of the study generally showed that the stock split announcement contain

relevant information to investors which are fully impounded in Share prices prior to

or almost instantaneously at the time of announcement. The returns were, however,

slower in reaction. This study is in agreement with Dasilaset al. (2008) in their study where

they sought to investigate Share price and stock volume reactions to simultaneous interim

dividend and stock split announcement at the Athen Securities exchange confirmed the

signaling hypothesis which predicts positive market reaction to the joint announcements

on stock and earnings.

In his findings, Lakhal (2008) indicated that quarterly earnings enhanced Share market

liquidity by shrinking bid-ask spreads. He however noted that earnings forecasts aggravated

information asymmetry before and after the announcement date. This result confirmed the

existence of information leakage and suggested that managers have considerable

discretion whether to make a forecast as well deciding its form, timing and specificity.

33

In support of the bird in hand theory, the study supports the view that earnings

announcement sends an unambiguous message that where the changes are positive, the

companies are confident of even better returns in the future. By the same token, negative

changes in earnings gives a sign that in the future, earnings may keep on dwindling and

they are not guaranteed.

5.4 Conclusion

5.4.1 Effect of Earning Announcement on Share Prices

The objective was to establish how earnings announcements affect Share prices and

indeed the study established that individual Share prices react either way (Gains or losses)

to stock split announcement . It can thus be concluded that the market is fairly efficient

since individual Shares react instantly to stock split announcement .

The objective was to establish how stock split announcement affect Share prices and indeed

the study established that Share prices react either way to stock split announcement

depending on the nature of the news (good or bad). It can thus be concluded that the market

is fairly efficient since Shares react instantly to stock split announcement.

5.4.2 Effect of Earning Announcement on Stock volume

The objective was to establish how stock split announcement affect Share volumes and

indeed the study established that Share volumes do not instantly react either way to

stock split announcement. It can thus be concluded that unlike share prices where

new information is fairly quickly reflected in fundamental Share prices, Stock volume

react much slower. This can be attributed to a wait and see approach and only offload or

acquire Share on the basis of a more sustained pattern.

5.5 Recommendations

Below are the recommendations for future improvement based on the research objectives.

5.5.1 Recommendations for Improvement

5.5.1.1Effect of Earning Announcement Share Prices

Considering that it is difficult to have a perfect research situation it is expected that

this research will have some limitations. Limitations of this study include first, not all

firms were included in the sample as would have been the ideal situation and would have

34

been more representative. Secondly, acquisition and compilation of the data for analysis

was exceedingly tedious; this involved finding the daily actual returns, finding daily NSE

20 Share index returns; comparing both returns before estimating the abnormal returns

for all firms listed at the Nairobi Share Exchange; computing average volumes and testing

for significance.

Admittedly, the sample was smaller than intended primarily on the absence of data in some

instances and therefore the firms in question may have been omitted on that basis. In

addition, the compilation of data thought satisfactory had gaps here or there but not

significantly.

5.5.1.2 Effect of Earning Announcement on Stock Volume

The study covered a span of four years. Perhaps a longer duration could have yielded more

return for investors. Again, many other things can affect the Share prices of listed

companies like weekend effects, January effect, but in this case only share prices was

considered and yet the announcements may not have been the only factor impacting on

prices.

5.5.2 Recommendations for Further Research

Most event studies at the NSE have been undertaken by using the NSE 20 share index as

a proxy, future studies should use the NASI all-share index which is more reflective

of the Share market. This may enable a proper assessment of the NSE index as a proxy. In

future studies on other models other then return analysis should be employed and

data should also cover a longer period. Also, more studies should be conducted to ascertain

why this study registered mixed results with respect the effect of earnings announcements

on prices as significant while the effect on volume was insignificant.

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APPENDICES

Appendix I: Letter of Introduction

June, 2017

Dear respondent,

I am a student at United States International University Africa (USIU-Africa) pursuing a

Masters of Business Administration program. In partial fulfillment of my course work, I

would like to conduct a research project to assess the EFFECTS OF STOCK SPLIT

ANNOUNCEMENTS ON STOCK PRICES OFPUBLIC QUOTED FIRMS IN KENYA

40

I need data on stock prices and volumes (-45 to +45 days) of the dividend

announcement dates. One dividend per company per period would be sufficient. I also

need the exact announcement dates and finally NSE share price indices for the period.

Your assistance is highly appreciated. Thank you.

Yours faithfully,

KEFA NGOIRI

Appendix II: Study Sample

NO. Quoted Firm

1 KENYA AIRWAYS

2 STANDARD GROUP LIMITED

3 BAT

4 EABL

5 PORTLAND CEMEN

41

6 ACCESS KENYA

7 CAR AND GENERAL

8 REAL VIPINGO

9 UCHUMI

10 KENOL KOBIL

11 WILLIAMSONS TEA

12 NATION MEDIA GROUP

13 KENGEN

14 ATHI RIVER MINING

15 TOTAL KENYA

16 SFARICOM LTD.

17 LIBERTY KENYA LIMITED

18 MUMIAS SUGAR COMPANY

19 CARBACID

20 SASINI

Appendix III: Data Collection Sheet

Stock Price and Volume Reaction to Stock split Announcements

FIRM NAME ………………………………………………………

DAY DAILY STOCK

PRICES

AVERAGE

NSE 20 SHARE

INDEX AVERAGE

VOLUME OF

STOCKS TRADED

-45

-44

-43

-42

-41

-40

-39

-38

-37

-36

42

-35

-34

-33

-32

-31

-30

-29

-28

-27

-26

-25

-24

-23

-22

-21

-20

-19

-18

-17

-16

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

43

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

Appendix IV: Change of share price of Financial Companies Listed at NSE over a

window period starting from day -45 to day +45 relative to Earnings Announcements

day (0-day)

Stock volume

DAY Event Window Average Market Proxy Average

-45 0.588393 0.101481

-44 -0.129278577 0.101481

44

-43 -0.051303564 0.00326

-42 0.026671448 0.00326

-41 0.057813 -0.062220667

-40 0.067363 -0.111331167

-39 0.436738459 -0.160441667

-38 0.424300812 -0.209552167

-37 0.411863166 -0.258662667

-36 0.399425519 -0.307773167

-35 0.386987872 -0.356883667

-34 0.374550225 -0.405994167

-33 0.362112578 -0.455104667

-32 0.349674931 -0.504215167

-31 0.337237284 -0.553325667

-30 0.324799638 -0.602436167

-29 0.312361991 -0.651546667

-28 0.299924344 -0.700657167

-27 0.287486697 -0.749767667

-26 0.27504905 0.003207

-25 0.262611403 0.006168

-24 0.250173756 0.009129

-23 0.23773611 0.01209

-22 0.225298463 0.315056467

-21 0.212860816 0.4680202

-20 0.200423169 0.620983933

-19 0.187985522 0.773947667

45

-18 0.175547875 0.9269114

-17 0.163110228 -0.020775

-16 0.150672582 -0.9684614

-15 0.138234935 -1.9161478

-14 0.125797288 -2.8638342

-13 0.206007 0.00165

-12 0.221101 0.00165

-11 0.003893 0.012

-10 0.00862 0.01545

-9 0.011075 0.020625

-8 0.00547 0.0258

-7 -0.000135 0.030975

-6 -0.00574 0.03615

-5 0.00547 0.041325

-4 0.01668 0.0465

-3 0.02789 0.051675

-2 0.0391 0.05685

-1 0.05031 0.062025

0 0.35495 0.096217

1 0.35495 0.000603

2 0.019343 0.000603

3 0.015646 0.003848

4 0.011949 0.007093

5 0.008252 0.003848

6 0.004555 0.006667

46

7 0.000858 0.004967

8 -0.002839 0.003405

9 -0.006536 0.001751

10 -0.010233 0.00012

11 -0.01393 -0.001511

12 -0.017627 -0.003142

13 -0.021324 -0.004773

14 -0.025021 -0.006404

15 -0.028718 -0.008035

16 -0.032415 -0.009666

17 -0.036112 -0.011297

18 -0.039809 -0.012928

19 -0.043506 -0.014559

20 -0.047203 -0.01619

21 -0.0509 -0.017821

22 -0.054597 -0.019452

23 0.040953 -0.021083

24 0.001384 -0.022714

25 0.003602 -0.024345

26 0.010976 -0.025976

27 0.014912667 -0.027607

28 0.019708667 -0.029238

29 0.024504667 -0.030869

30 0.029300667 -0.0325

31 0.034096667 -0.034131

47

32 0.038892667 0.050855

33 0.043688667 -0.037393

34 0.048484667 -0.125641

35 0.053280667 -0.213889

36 0.058076667 -0.302137

37 0.062872667 -0.390385

38 0.067668667 -0.478633

39 0.00526 0.001417

40 0.00108 0.001695

41 -0.041919111 0.197596

42 -0.075213444 0.363225

43 -0.108507778 0.528854

44 -0.141802111 0.694483

45 -0.175096444 0.860112

Appendix V: Stock volume of Financial Companies Listed at NSE over a window

period starting from day -45 to day +45 relative to Stock Split Announcements day

(0-day).

Stock volume

DAY Event Window Average Market Proxy Average

-45 0.019613 -0.00286

-44 0.029163 0.003383

-43 0.022214 0.000588

-42 0.009785 -0.00076

-41 0.024879 -0.00011

-40 0.039973 -0.000792

48

-39 0.055067 -0.001141

-38 0.070161 -0.00149

-37 0.085255 -0.001839

-36 0.100349 -0.002188

-35 0.115443 -0.002537

-34 0.130537 -0.002886

-33 0.145631 -0.003235

-32 0.160725 -0.003584

-31 0.175819 -0.003933

-30 -0.000792 -0.004282

-29 -0.001141 -0.004631

-28 -0.00149 -0.002715

-27 -0.001839 0.000246

-26 0.009785 0.003207

-25 0.024879 0.006168

-24 0.039973 0.009129

-23 0.055067 0.01209

-22 0.070161 -0.04665

-21 0.085255 -0.041475

-20 0.100349 -0.0363

-19 0.115443 -0.031125

-18 0.130537 -0.02595

-17 0.145631 -0.020775

-16 0.160725 -0.0156

-15 0.175819 -0.010425

-14 0.190913 -0.00525

-13 0.206007 0.00165

-12 0.221101 0.00165

49

-11 0.003893 0.012

-10 0.00862 0.01545

-9 0.011075 0.020625

-8 0.00547 0.0258

-7 -0.000135 0.030975

-6 -0.00574 0.03615

-5 0.00547 0.041325

-4 0.01668 0.0465

-3 0.02789 0.051675

-2 0.0391 0.05685

-1 0.05031 0.062025

0 0.01183 0.003207

1 0.02304 0.000603

2 0.019343 0.000603

3 0.015646 0.003848

4 0.011949 0.007093

5 0.008252 0.003848

6 0.004555 0.006667

7 0.000858 0.004967

8 -0.002839 0.003405

9 -0.006536 0.001751

10 -0.010233 0.00012

11 -0.01393 -0.001511

12 -0.017627 -0.003142

13 -0.021324 -0.004773

14 -0.025021 -0.006404

15 -0.028718 -0.008035

16 -0.032415 -0.009666

50

17 -0.036112 -0.011297

18 -0.039809 -0.012928

19 -0.043506 -0.014559

20 -0.047203 -0.01619

21 -0.0509 -0.017821

22 -0.054597 -0.019452

23 -0.021083

24 0.001384 -0.022714

25 0.003602 -0.024345

26 0.010976 -0.025976

27 0.014912667 -0.027607

28 0.019708667 -0.029238

29 0.024504667 -0.030869

30 0.029300667 -0.0325

31 0.034096667 -0.034131

32 0.038892667 -0.035762

33 0.043688667 -0.037393

34 0.048484667 -0.039024

35 0.053280667 -0.040655

36 0.058076667 -0.042286

37 0.062872667 -0.043917

38 0.067668667 -0.045548

39 0.00526 0.001417

40 0.00108 0.001695

41 -0.041919111 0.001973

42 -0.075213444 0.002251

43 -0.108507778 0.002529

44 -0.141802111 0.002807

51

45 -0.175096444 0.003085