STOCK PRICE RESPONSE TO BONUS SHARE ANNOUNCEMENT-
EVIDENCE FROM NSE, INDIA
Dr. Disha Pathak1, Dr. Komal Nagrani2
1Assistant Professor, Amity Global Business
School, Hyderabad, dishame7@gmail.com,
2Assistant
Professor, Amity Global Business School, Hyderabad, komal_nagrani@yahoo.in
Abstract
Corporate events have considerable effect
on the movement of stock price that attracts lots of research. Likewise, Bonus
share is one of the significant events in company and brings volatility to the
stocks. The present study focuses on response of stock price movement to the
announcement of bonus share. A study focused on 4 selected stocks having bonus
share announcement between October 2019 to March 2021. A standard event study
methodology was used to analyze the response of bonus share announcement on
abnormal returns (AR) for the sample stocks surrounding forty one days of the
announcement date (including announcement date). Average abnormal returns (AAR)
and cumulative average abnormal returns (CAAR) were computed. Paired t-test was
used for analyzing significance of bonus share announcement on AAR. From the
study, it can be inferred that bonus share announcement has shown negative
significant impact on AAR.
Keywords:
Bonus share,
Abnormal returns, Average abnormal returns, Cumulative abnormal returns, Event study
methodology.
Introduction
As per concept, Bonus share is illusion which
increases the number of outstanding equity shareswithout impacting onexisting stockholder’s
proportional ownership. Bonus share
announcement has no real economic significance as it does not impact any cash
inflow or outflow. Per se, it would not
be expecting any noteworthy price movement on announcement of bonus issue. Differing
to this theoretical assumption, past studies show that bonus share
announcements reported a significant stock price movement. It is therefore a
matter of research that the firm announcing bonus share experience significant
changes in their share prices. Therefore, association between bonus share
announcement and stock prices movement has been subject of much empirical
research. In this study focus is on to analyze the reactions of bonus share
declaration on the share prices movement with respect to market return.
Literature
Review
Michelle &Shiguang
(2001) dissected
the responses of China’s stock prices to the bonus issue announcement. Analysis
showed that the higher ratio of bonus issue leads to positive return while the
lower ratio of bonus announcement provided almost negative pay out.
Balachandiran, Faff, & Jong (2005) studied
Australian stock market to analyze the share price response to
bonus share announcement. Results displayed significant positive abnormal
return on the announcement day and also on the next trading day of announcement.
Budhraja,
Parekh & Singh (2004) examined BSE listed stock for impact of bonus issue
announcement. Results confirmed that sample exhibited abnormal returns around
the bonus issue announcement date over three trading days from one day before
the announcement. Study also supports signal trading on insider information.
Mishra
(2005) studied 46 Indian companies stock price movement before and after the
bonus issue announcement date. He applied standard event study model consist of
a period of twenty days pre and post the event. Research found that the sample
companies starts experiencing positive abnormal returns eight to nine days
before the bonus issue announcement. Reason for this experience is the leak of
the information.
Malhotra,
Thenmozhi&Arun Kumar (2007) analyzed stock price response to bonus share
announcement for a sample of Indian companies. Event study methodology has been
adopted foranalyzing the bonus share announcement reaction. As per analysis,
announcement of bonus sharegives negative abnormal returns around the
announcement date
Shirur
(2008) exploredthe reasons for issuing of bonus shares and stock splits. This
research tried to find circumstances under which a company decides whether toissue
bonus shares or to go for stock splits. Research considered 5 variables for the
study,viz., rate of growth of sales, profit, share price, beta and promoter
stake. Focus of the study was to explore whether these variables show any significant
difference as applicable to bonus shares and stock split. The study reported
that management of the corporate take decision to issue bonus shares when the
investors undervalue the stock for a long. Management takes decision to go for
stock split when the investors overvalue the company for a long time.
Dhar&Chhaochharia(2008)
examined impact of stock splits and bonus share issue in Indian stock market.
Capital Asset Pricing Model was used to calculate abnormal returns and then
t-tests conducted to test thesignificance. Result of this study supports the
existence literatures, two events has significant positive impact on stock
price. The abnormal returns observed about 1.8% for bonus issues and it was
0.8% for stock splits.
Research
Methodology
3.1
Objectives
1. To analyze abnormal returns (AR) of
stocks surrounding 41 days of bonus share announcement.
2. To assess the impact of bonus share
announcement on average abnormal returns (AAR) during pre and post event
window.
3.2
Sample
For the present study, the companies which
are part of NIFTY 100 and NIFTY Mid Cap 100 as on 31/03/2022 and announced
bonus share during the period from October 2020 to March 2022 have been
considered for the sample selection. Hence, finally 4 companies(Table 1) have
been selected based on the selection criteria.
Table 1:
Companies with Bonus Share Announcements
|
Company Name |
Ratio |
Bonus Share Announcement Date |
Benchmark Indices |
|
04:01 |
31-08-2021 |
NIFTY Mid Cap 100 |
|
|
01:03 |
17-06-2021 |
NIFTY 100 |
|
|
01:02 |
03-05-2021 |
NIFTY Mid Cap 100 |
|
|
01:01 |
05-10-2020 |
NIFTY 100 |
3.3
Data Analysis Techniques
Present study used standard event study
methodology. The event date, event window and estimation window are defined as
following for the study:
The
event date is considered the bonus share announcement date by
the company management. It assumes that the information was first known to the
market on the event date itself.
The
event window is taken as t = -20 to t = +20 relative
to the event day t = 0. This event window will use in studying the stock price
movement pre and post the event.
The
estimation window is from one year before of t = -20 to the
event day t = 0. Estimation windowwill help in estimating the relationship between
a company’s returns and benchmark Indices. Then estimation window will help in
calculation of intercept and slope in OLS regression for the purpose of
calculating of expected returns.
For
data analysis following steps have been used;
1. Raw
Return of i security and raw return of for period t is calculated as
Current Daily Return =
(current day close price – previous day close price) / previous day close price
2. Alpha and beta values are calculated
using OLS regression equation for the estimation window
3. The expected return for each firm is
obtained as
Expected Return = [Alpha
+ (Beta * Benchmark Indices Actual Return)]
4. Abnormal returns is calculated as
follows
Abnormal Returns= Actual
Return – Expected Return
5. The Average Abnormal Returns (AAR) are
obtained by averaging the abnormal returns of the sample companies for each day
of event period.
AAR = Σ AR/N
6. The Cumulative Average Abnormal Returns
(CAAR) is the sum of daily AAR during the event window.
7. For testing hypothesis related to
abnormal returns of individual stocks and AAR of pre and post period of the
event window, ‘paired t’ test is used to identify whether there is significant
difference in performance during pre and post period.
H1:
There is significant difference between the abnormal returns (AR) earned by
individual stock before and after the bonus share announcement in the stock
market.
H2:
There is significant difference between the average abnormal returns (AAR)
earned before and after the bonus share announcement in the stock market
Data
Analysis & Interpretation
Abnormal returns illustrate the over/lower
returns given by a given stock or portfolio in comparison to expected rate of
return for a specific period.Abnormal returns of4 sample stocks have calculated
and reported in table 2. All companies except Varun Beverages provided more
numbers of days negative returns during post bonus share announcement period
compared to pre-announcement event. Only mid cap companies, Varun Beverages
& SRF provided positive returns on the day of announcement. Analysis
documented that investors may not gain after the announcement of bonus share.
Table 2:
AR, AAR and CCAR of Sample Companies
|
Event Window |
AR-Power Grid |
AR-Britania |
AR-Varun Beverages |
AR- SRF |
Sum of AR |
AAR |
CAAR |
|
-20 |
-1.48 |
0.21 |
-1.55 |
2.44 |
-0.38 |
-0.09 |
-0.09 |
|
-19 |
-1.76 |
0.26 |
-0.65 |
0.21 |
-1.94 |
-0.49 |
-0.58 |
|
-18 |
1.14 |
0.39 |
-2.49 |
0.88 |
-0.08 |
-0.02 |
-0.60 |
|
-17 |
0.82 |
0.32 |
0.07 |
-0.65 |
0.56 |
0.14 |
-0.46 |
|
-16 |
-3.55 |
-1.85 |
1.43 |
-1.08 |
-5.06 |
-1.27 |
-1.72 |
|
-15 |
0.97 |
1.10 |
-0.88 |
1.09 |
2.28 |
0.57 |
-1.15 |
|
-14 |
-1.71 |
-1.36 |
-1.32 |
-0.20 |
-4.59 |
-1.15 |
-2.30 |
|
-13 |
-0.69 |
-0.36 |
3.68 |
-1.13 |
1.49 |
0.37 |
-1.93 |
|
-12 |
-0.51 |
2.25 |
0.36 |
-0.58 |
1.51 |
0.38 |
-1.55 |
|
-11 |
1.13 |
-0.26 |
-0.78 |
0.74 |
0.83 |
0.21 |
-1.34 |
|
-10 |
-1.13 |
-0.56 |
-1.54 |
-0.55 |
-3.78 |
-0.94 |
-2.29 |
|
-9 |
-0.04 |
-2.58 |
-4.02 |
3.26 |
-3.39 |
-0.85 |
-3.13 |
|
-8 |
4.09 |
-0.51 |
-1.30 |
-1.86 |
0.43 |
0.11 |
-3.03 |
|
-7 |
-0.93 |
1.07 |
-4.20 |
0.63 |
-3.43 |
-0.86 |
-3.89 |
|
-6 |
4.01 |
1.93 |
-1.44 |
1.57 |
6.06 |
1.52 |
-2.37 |
|
-5 |
-0.79 |
-0.05 |
1.60 |
-1.30 |
-0.54 |
-0.13 |
-2.50 |
|
-4 |
1.62 |
-0.17 |
2.56 |
-0.85 |
3.17 |
0.79 |
-1.71 |
|
-3 |
0.97 |
-0.06 |
0.35 |
1.02 |
2.28 |
0.57 |
-1.14 |
|
-2 |
-0.74 |
1.28 |
-0.58 |
2.88 |
2.84 |
0.71 |
-0.43 |
|
-1 |
-1.65 |
-1.04 |
1.64 |
1.18 |
0.13 |
0.03 |
-0.40 |
|
0 |
-0.50 |
-0.14 |
5.36 |
3.70 |
8.43 |
2.11 |
1.71 |
|
1 |
-2.76 |
-2.87 |
-0.09 |
-2.88 |
-8.59 |
-2.15 |
-0.44 |
|
2 |
0.40 |
-0.05 |
-0.82 |
1.38 |
0.92 |
0.23 |
-0.21 |
|
3 |
-0.53 |
-0.55 |
-1.34 |
1.09 |
-1.32 |
-0.33 |
-0.54 |
|
4 |
-0.30 |
-1.90 |
0.74 |
-1.58 |
-3.03 |
-0.76 |
-1.30 |
|
5 |
-0.89 |
-0.55 |
-2.04 |
-0.64 |
-4.12 |
-1.03 |
-2.33 |
|
6 |
-0.52 |
0.27 |
0.19 |
-0.43 |
-0.49 |
-0.12 |
-2.45 |
|
7 |
0.59 |
0.75 |
-0.79 |
1.15 |
1.69 |
0.42 |
-2.03 |
|
8 |
2.10 |
0.28 |
0.43 |
2.90 |
5.72 |
1.43 |
-0.60 |
|
9 |
-1.36 |
-0.30 |
-1.35 |
-1.45 |
-4.47 |
-1.12 |
-1.72 |
|
10 |
-0.53 |
-0.23 |
-0.64 |
4.08 |
2.67 |
0.67 |
-1.05 |
|
11 |
-1.39 |
-6.11 |
2.50 |
0.44 |
-4.57 |
-1.14 |
-2.19 |
|
12 |
0.47 |
-4.74 |
0.22 |
-0.97 |
-5.03 |
-1.26 |
-3.45 |
|
13 |
-0.60 |
1.93 |
-2.01 |
-2.60 |
-3.28 |
-0.82 |
-4.27 |
|
14 |
0.61 |
-0.04 |
0.80 |
-0.18 |
1.20 |
0.30 |
-3.97 |
|
15 |
0.77 |
1.47 |
2.21 |
-1.03 |
3.42 |
0.85 |
-3.12 |
|
16 |
-0.24 |
1.45 |
-1.08 |
1.01 |
1.13 |
0.28 |
-2.83 |
|
17 |
-0.57 |
0.09 |
-0.33 |
0.72 |
-0.09 |
-0.02 |
-2.85 |
|
18 |
-0.67 |
-0.07 |
-0.99 |
0.87 |
-0.86 |
-0.22 |
-3.07 |
|
19 |
0.38 |
-1.63 |
0.13 |
-1.37 |
-2.49 |
-0.62 |
-3.69 |
|
20 |
-0.16 |
-1.86 |
-0.47 |
1.39 |
-1.09 |
-0.27 |
-3.97 |
The AAR is the mean variation of actual
returns of a stock from the expected returns. For AAR calculation, the abnormal
returns of securities are averaged for each day of the event window and
documented in Table 2 and Figure 1. The values of AARs presented fluctuating
returns both positive and negative returns around the event window. The AAR was
positive for 11 days and negative for 9 days during the pre announcement period
of 20 days. The AAR was 7 days positive and 13 days negative during the post
announcement period. Highest AAR was recorded 2.11% on the announcement day.
AAR experienced higher volatility in post announcement period compared to pre
announcement period.
Figure 1:
AAR of Sample Companies
CAAR provides information about the average
price behavior of stocks during the event window. CAAR is determined by
cumulating AAR as shown in Table 2 and Figure 2. Only once positive 1.71% CAAR
was observed during (-20 to 0 days) the event window period. On all other days
CAAR reported negative for the study period. CAAR dropped to its lowest level
of -4.27% during (- 20 to 13 days) event window. It was observed -3.97% during
the complete (-20 to 20 days) event window period. It is observed that CAAR was
found to be degrading graduallyduring the event window period.
Figure 2:
CAAR of Sample Companies
Average abnormal returns of all sample
companies for before and after bonus share announcement periodhas reported in
Table 3. Results shows that mean of abnormal return for Power Grid before bonus
share announcement was -0.01% which declined to -0.26% during the post bonus
share announcement. All the companies have observed same trend as Power Grid of
higher abnormal returns in pre announcement period compared to post
announcement period contradicting to the previous researches. Paired t-test was
usedfor testing hypothesis of significance difference between the abnormal
returns earned by stock pre and postbonus share announcement. Only SRF has exhibited
p value 0.02 which is lesser than 0.05, so it means there is significant
difference in mean of abnormal returns before and after bonus share
announcement. But, for all other stocks null hypothesis is accepted as p value
is higher than 0.05 means there is no significant difference in abnormal
returns between pre and post bonus share announcement.
Table 3:
Paired t Test for Pre and Post Bonus share Announcement related to AR of
individual stocks and AAR
|
|
Mean of AR for Pre period(-1 to
-20 days) |
Mean of AR for Post Period (1 to
20 days) |
P Value |
Significance |
|
Power Grid |
-0.01 |
-0.26 |
0.60 |
No |
|
Britania |
0.00 |
-0.73 |
0.11 |
No |
|
Varun Beverages |
-0.45 |
-0.24 |
0.71 |
No |
|
SRF |
0.39 |
0.10 |
0.02 |
Yes |
|
AAR ( All companies) |
-0.02 |
-0.28 |
0.23 |
No |
AAR for before and after bonus share
announcement is reported in Table 3. Analysis shows that AAR mean was -0.02%
during pre announcement which dropped to -0.28% for the post announcement
window. Paired t-test results showed that p value is 0.23 which is insignificant
at 5% significance level. It means that null hypothesis is accepted and it can
be concluded that there is no significant difference between AAR during pre and
post period of bonus share announcement in the stock market.
Conclusion
The
study focused on 4 stocks which haveannounced bonus share between October 2020
to March 2022 and its impact on stock performance. The standard event
methodology is applied to investigate the impact of bonus share announcement on
price movement in market. As per analysis, negative AAR was experienced for
more days in post bonus share announcement period compared to pre bonus share
announcement period. It implies that
bonus share announcement has shown negative impact on AAR for the study period.
It is also apparent from CAAR results that investors could not earn excess
return during the event window period (- 20 to +20 days). Investors can only
earn positive CAAR on the announcement day. Empirical results also supports that there is
no significant difference between the average abnormal returns (AAR) observed pre
and post announcement of bonus share.
References
[1]
Balachandran, B., Faff,
R., & Jong, L. (2005). Announcements of bonus share options: Signalling of
the quality of firms. Global Finance Journal, 16(2), 180-190.
[2]
Barnes, M. L., & Ma,
S. (2001). Market Efficiency or not? The Behaviour of China’s Stock Prices in
Response to the Announcement of Bonus Issues, Centre for International
Economics Discussion Paper, 12
[3]
Budhraja, I., Parekh, P.,
& Singh, T. (2004). Empirical Study on Market reaction. papers. ssrn.
com/sol3/Delivery. cfm. SSRN_ID1087200_code654999. pdf.
[4]
Dhar, S.,
&Chhaochharia, S. (2008). Market reaction around the stock splits and bonus
issues: some Indian evidence. Available at SSRN 1087200.
[5]
Malhotra, M., Thenmozhi,
M., &ArunKumar, G. (2007, December). Stock market reaction and liquidity
changes around bonus issue announcement: Evidence from India. In 10th Capital
Markets Conference, Indian Institute of Capital Markets Paper.
[6] Mishra,
A. (2005). An empirical analysis of market reaction around the bonus issues in
India. Indian Institute of management working paper, (2005-10).
[7]
Shirur, S. (2008).
Dilemma of corporate action: empirical evidences of bonus issue vs. stock
split. Vikalpa, 33(3), 35-48..
Webography: