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Ndegwa, SK.  2013.  The effects of share splits on long run stock returns for companies listed at the Nairobi securities exchange. , Nairobi: University of Nairobi Abstract

Share splits are a common corporate event among listed companies. Though it is
commonly practiced it has been described as a mere accounting change that increases
the number of shares outstanding without any benefit to the shareholders. This study
sought to determine the effects of share splits on long run stock returns among listed
companies at the Nairobi securities Exchange. The study covered returns for twenty
four months after the company had undergone a share split. The study therefore
sampled firms that had been in operation for at least twenty four months after they
had undergone a share split. There were eleven firms listed at the NSE that fulfilled
this condition and were therefore sampled for this study.
The study used the long run study methodology and applied the buy and hold
benchmark approach. The method required the identification of the event firm and its
benchmark firm and comparing the returns achieved by each of these firms
correspondingly for the same month. Secondary data obtained from the Nairobi
Securities Exchange was used in this study. The data consisted of monthly opening
and closing share prices of each of the sampled firms together with those of its
identified benchmark firm for the entire twenty four months of the study. The study
method required the determination of each of the sampled event firm’s monthly buy
and hold returns and comparing these returns with those of its benchmark firm, which
acted as a proxy for the market. The benchmark firm was identified as another firm
which had not undergone a share split and was within 70% to 130% of the share
capital of the event firm at the time of the event firm’s share split, and has a book to
market equity (BE/ME) ratio that is closest to that of the event firm. The monthly
returns of the event firm are then compared with those of its benchmark firm. The
difference in the monthly returns achieved by the paired firms constitutes the buy and
hold abnormal return (BHAR) for the event firm. The buy and hold abnormal returns
for each firm were then tested for difference from zero at 5% significance level in
order to determine whether there is any difference between the returns of the event
firm and the returns of its benchmark firm.
The study found that among all the eleven firms sampled; only two firms achieved a
positive mean buy and hold abnormal return of 1.89% and 3.72% respectively. The
other nine firms representing 82% of the sampled firms achieved a mean negative buy
and hold abnormal returns ranging from -4.94 % to -0.14 %. These returns were
however found to be insignificant at 95% confidence level. This implies that there
was no significant difference between the returns achieved by the event firm and the
returns achieved by its benchmark firm for the period under study. The study
therefore concluded that share splits at the Nairobi securities exchange have
insignificant effects on stock returns for the first two years following a share split.
However further studies on its effects on periods longer than two years would be
recommended in order to develop a hypothesis. The criteria for the choice of the
benchmark firm would also need to include a consideration of the industry in which
the event firm is operating in order to allow for proper benchmarking of the paired
firms returns. Firms from the same industry would be affected by market conditions in
the same way.

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