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.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study has been summarized and stated as follows:
1. To investigate whether the announcement of bonus issues in Nigeria have significant signaling impact on share prices.
2. To determine whether there are significant abnormal returns occurring on and around the announcement date.
3. To test for the semi-strong form efficient market hypothesis of the Nigerian
Stock Exchange.
1.4 RESEARCH QUESTIONS
From the objectives lined out above, this research will attempt to answer the following questions:
1. To what extent does bonus issue announcement in Nigeria has significant signaling impact on share prices?
2. What are the significant abnormal returns occurring during and around the announcement date?
3. To what extent is the Nigerian Stock Exchange semi-strong form market efficient?
1.5. STATEMENT OF HYPOTHESES
To actualize the objectives of this study and in attempt to answer the research questions above, the following hypotheses stated in the null form are tested;
HYPOTHESIS I
Ho: Bonus issue announcement in Nigeria has no significant signaling impact on share prices.
HYPOTHESIS II
Ho: There are no significant abnormal returns occurring during and around the announcement of event date.
HYPOTHESIS III
Ho: The Nigerian Stock Exchange is not semi-strong form efficient
1.6. SCOPE OF THE STUDY
This study intends to test the semi strong form market efficiency of the Nigeria Stock Exchange using public information of bonus issues. The time frame for the study is one year ( 240 trading days on the floor of the Exchange) covering from April 1, 2007 to March 31, 2008. The reason for the period is due to the nature of the data, using daily stock returns and daily market returns. Twenty-five (25) quoted companies that issued bonuses within the period were sampled across fourteen (14) industrial sectors of the economy.
1.7. SIGNIFICANCE OF THE STUDY
This study is significant as it intends to throw more light on bonus issues syndrome in Nigeria with emphasis on its impact on stock price of firms in the market. More importantly, to measure the resultant effect, the abnormal returns from investors’ reaction.
The research is also significant, as it will provide information on several aspects of bonus issue in the Nigerian stock market, and its activities as a whole.
The study is also important, in that it will serve as a magnum opus and go a long way in assisting analysts, planners, policy makers and market regulators, accounting standard setters, government, managers of firms in formulating policies that will ensure a more efficient and dynamic bonus issue management approach in Nigeria. This would guard against possible future bonus shares problems in the future.
This research is expected to provide to the academic sector, a new horizon of enlightenment, as it will serve as a basis for further research work by other researchers who may wish to research into related topics.
1.8 LIMITATION OF STUDY
This study has been limited by a number of factors, which are as follows;
Lagged Nature: While some companies may announce their bonus issue in a period, others in different periods. Therefore, the lag in the period of announcement is a constraint in collating of data, considering the number of days in focus.
Literature: Almost scanty of literature exist on the subject matter in Nigeria. Empirical studies on bonus issues and stock prices in Nigeria are still scanty. Foreign literature with different economic and political background exist more on the subject matter.
Finance: Finance is a major constraint, as the researcher studying in Enugu has to travel outside the state in search of data. The cost of accessing materials from the internet is astronomically much.
Performance Measures: The proxies for the performance measures are derived from the Nigerian Stock Exchange (NSE) All–Share Price Index and the companies’ financials. Given the variety of data represented in the study, and the difficulties in computing
abnormal returns manually, the researcher resorted to systems computation in line with international works.
1.9. DEFINITION OF TERMS.
All-Share Price Index: It is a composite index used to measure changes in financial market. In a stock market, it reflects changes in market price and number of shares outstanding of the companies in the index.
Asymmetric Information:This is when an information that is known to insider of company and those that have relationship with the company and is not known to outsiders (the public) and vice versa.
Bonus issue: Bonus issue is a “free’’ issue of shares without a subscription price, made to existing shareholders in proportion to their current investment.
Bonus Ratios: Bonus ratio is the number of bonus shares in the issue/number of existing shares applicable for the bonus issue.
Bullish: Bullish is a situation where higher prices in the market appear warranted.
Emerging Markets: These are financial markets of developing economies or developing capital markets.
Estimation window: The period of data used in the estimation of parameters is known as an estimation window.
Events: An event is what the investigator would like to study and it conveys information that potentially influences stock prices. The event defined for this study is the announcement of bonus issue.
E– bonus: E-bonus refers to the electronic issuance of bonus, such that after the bonus issue, the accounts of investors (beneficiaries) will be directly credited at the CSCS (Central Security Clearing System) and no certificate are issued unless investors demand for them.
Fundamental analysis: This involves using market information to determine the intrinsic value of securities in order to identify those securities that are undervalued.
Insiders: Insiders are principal officers and directors of a company and those with business relationship with it such as auditors, reporting accountants and lawyers as well as those holding a specified percentage (in most countries 5% or above) of the outstanding share of a company.
Listed Companies: These are companies, whose securities are traded on the floor of the Stock Exchange, having met all the requirements of the Exchange that qualifies it to be quoted.
Market-Maker: A market-maker is a dealer who stands ready to buy and sell securities for his own account at his own risk. By so doing, a market–maker provides liquidity to and maintains stability in the market.
Portfolio: This is the totality of the various types of securities and other financial instruments (stock, bonds, treasury bills etc) held by investors. Although it mostly refers to financial instruments, real estate investments are often included.
Registrar: A registrar is a capital market operator appointed by a public company to prepare a comprehensive list of its bond/shareholders. They are responsible for dispatching annual reports, dividend warrants and return monies and documents to shareholders.
REH: Retained Earnings Hypothesis is a hypothesis, whereby given stock dividends, the value of the newly issued share is subtracted from retained earnings and added to the firm’s capital accounts.
Share-buy back: This is a situation when some quoted companies get involved in buying up their stocks when there is massive drop in price
and lend the impression that the stocks are well sought after by the public.
Technical analysis: Technical analysis uses past patterns of price and the volume of trading as the basis for predicting future prices. The random-walk evidence suggests that prices of securities are affected by news. Favourable news will push up the price and vice versa.
This material content is developed to serve as a GUIDE for students to conduct academic research
EMPIRICAL ANALYSIS OF THE SEMI-STRONG FORM MARKET EFFICIENCY OF THE NIGERIAN STOCK EXCHANGE
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