Market Reaction to Bonus Announcement in Post Global Financial Crisis Era: Evidence from India

Transcription

1 Marke Reacion o Bonus Announcemen in Pos Global Financial Crisis Era: Evidence from India Mayank Joshipura Mayank Joshipura is Professor (Finance) a School of Business Managemen NMIMS Universiy, Mumbai, India Nusrahunnisa School of Business, Alliance Universiy, Bangalore, India Received: Sep. 26, 2013 Acceped: November 18, 2013 Published: December 1, 2013 doi: /ajfa.v5i URL: hp://dx.doi.org/ /ajfa.v5i Absrac This sudy examines he sock price reacion coniguous wih bonus announcemen surrounding is announcemen and effecive day in pos global financial crisis period. Sample of 74 bonus announcemens from he consiuens of Indian CNX 500 companies ha announced bonus have been used for he period beween 2008 hrough The sandard even sudy mehodology has been used. According o semi-srong form of efficien marke hypohesis any informaion conen associaed wih bonus announcemen mus be refleced in form of abnormal reurn on announcemen day iself. However, several sudies, repor posiive abnormal reurns associaed wih bonus surrounding announcemen as well as effecive days. This sudy repors saisically significan posiive abnormal reurn surrounding announcemen as well as effecive day and i is consisen wih earlier sudies. Keywords: Bonus Announcemen, Marke Efficiency, Even Sudy, Sock Dividend, Marke Reacion JEL Classificaion: G14 256

2 1. Inroducion The relaionship beween bonus issues and sock prices has been he subjec of empirical discussion in finance lieraure. Under he bonus issue, new shares are issued free of cos o he exising invesors by capialising he reserves, accumulaed profis or reained earnings. Bonus issue of 1:1 by a company leads o doubling of number of shares and share capial wihou changing face value of a share. According o semi-srong form of efficien marke hypohesis, if here is any informaion conen associaed wih bonus announcemen i should ge refleced on announcemen day iself in form of abnormal reurns. No abnormal reurns should be presen on or around ex-dae because, he ex-dae of bonus issue is known in advance and herefore should no conain any new informaion. However, several sudies, boh in developed and developing markes, repor significan posiive abnormal reurns on and surrounding announcemen and effecive days. There are several hypoheses pu forward o explain such effec. However, global financial crisis hi he world economy badly and he enire world is sill o find new normal. In ha conex is i imporan o sudy ha wheher global financial crisis really alered marke reacion o bonus announcemen in any manner. The firms announcing sock dividend in igh liquidiy markes like he ones seen pos global financial crisis may be perceived as looking a growh opporuniies for hemselves a imes where ohers were sruggling o keep heir head ou of waer and finding i hard even o uilize exising capaciy. Bonus announcemen may well be seen as a signal of he firm s confidence in abiliy o exploi growh opporuniies in difficul imes considering he fac ha many firms used heir reserves o keep paying cash dividends in imes when profis were no enough and in many cases were no exisen. Announcing sock dividend definiely reduces firm s abiliy o deep ino is reserve o pay cash dividend in difficul imes and herefore such announcemen in difficul imes may cerainly speak for iself and firm s confidence abou is fuure. However, i may urn ou o be a double edged sword if hings don go as per plan. The curren sudy examines he sock price reacion coniguous wih bonus announcemen surrounding is announcemen and effecive day in pos global financial crisis period o see how marke looks a such acion by a firm and adds new findings o he exising lieraure by examining wheher Indian sock marke is semi- srong efficien or no. The sudy aemps o answer his empirical quesion of informaional conen of sock dividend announcemens using sandard even analysis mehodology. The paper from hereon is divided ino following secions. Secion II discusses review of lieraure, secion III elaboraes on mehodology, secion IV focuses and discussion of resuls and secion V is conclusion. 2. Review of Lieraure Numerous empirical sudies have found ha announcemen of bonus issues / sock splis are associaed wih significan sock price reacions upon announcemen. Many exigen hypoheses have been proposed in he lieraure o explain his marke behaviour. Signaling hypohesis and liquidiy hypohesis have emerged as he wo leading explanaions for his marke behaviour. Ball, Brown and Finn (1977) invesigaed sock price reacion around he announcemen of 257

3 sock capialisaion changes (bonus sock issues, sock splis and righs issues) in Ausralia for he period beween 1960 and 1969 inclusive using monhly daa and found 20.2% abnormal reurn for 13 monhs up o including he monh of bonus issue announcemens. Foser and Vickrey (1978) examined daily reurns around announcemen and deermined wheher sock dividend announcemens cause invesors o change heir expecaions concerning fuure firm prospecs. In heir examinaion of he informaion conen for 82 sock dividend announcemens, hey found significan posiive abnormal reurns around announcemen daes. Woolridge (1983) examines he daily reurns around 317 sock dividend announcemens conrolled for earnings announcemens and cash dividend paymens and found ha sock dividend announcemens are inerpreed by invesors as posiive signals from managers abou he fuure business operaions. Grinbla, Masulis and Timan (1984) examined sock splis and sock dividends under he radiional signaling model and suggesed ha i can be considered as a cosly signal. In case of sock dividends, he reducion in reained earnings will resric he firm s sabiliy o pay cash dividends if he firm does no anicipae increased earnings. Doran and Nachmann (1988) using a sample of 879 firms which issued sock dividends beween 1971 and 1982 repors ha bonus announcemens led o upward revision of earnings expecaions ha is similar o aenion geing hypohesis. Ghosh and Woolridge (1988); Banker, Das, and Daar (1993) invesigae he cash subsiuion hypohesis and find negaive sock price reacion o dividends cus and omissions could be offse by an announcemen of sock dividend as a subsiue. Lijleblom (1989) examines he signaling hypohesis of sock dividend and sock splis for socks lised on he Sockholm Sock Exchange (SSE).The problem of simulaneous announcemens of oher informaion is presen in 90% of he cases a (SSE).The conaminaing effecs of earnings and dividend announcemens are conrolled by using a conrol group of oherwise similar socks bu which do no spli or disribue a sock dividend. They find significanly high price reacions for he sock dividend/spli group han he conrol group which is inerpreed as suppor for he signaling hypohesis in he presence of conaminaing announcemens. McNichols and Dravid (1990) provide furher evidence o suppor he signaling hypohesis and repored posiively significan abnormal reurns on he day of sock dividend announcemen. Furher hey find ha boh small sock dividend facor sample (less han 10%) and large sock dividend facor sample show saisically significan abnormal reurns on he announcemen day. Masse e al. (1997) examined he announcemen day impac of sock splis, reverse splis and sock dividends of Torono Sock Exchange from Abnormal reurns are derived using he mean adjused reurns model, he marke adjused reurns model and he simple ordinary leas square marke model. For he sock dividends, abnormal reurns are posiive from day 0 o day 2 and on day 0 and day 1 average abnormal reurn are saisically significan a 1% level. In a nushell, here are several hypoheses pu forward o explain he posiive abnormal reurns associaed wih bonus announcemens. Mohany (1999) found ha firms which issued bonus shares, have eiher mainained he payou a he pre-bonus level or only decreased i marginally hereby increasing he payou o shareholders. Papaioannou e al. (2000) found no significan abnormal reurns on and around announcemen period as in Greece i is compulsory requiremens imposed upon firms o saisfy he legal requiremens a However heir research environmen is quie differen from oher markes, sock dividends in Greece are no iniiaed by firms bu hey are compulsory requiremens imposed upon firms o saisfy legal requiremens and any sock dividend announcemen should ge he approval 258

4 from he shareholders along wih he erms of he disribuion. Balachandran e al. (2004) observed posiive and saisically significan abnormal reurns for he announcemen day o he following day and found ha abnormal reurns or conaminaed evens ouperform he unconaminaed evens on day 0. However difference of abnormal reurns is no saisically significan. Given below is a summary of main hypohesis floaed around o explain marke reacion o bonus announcemen. Signaling hypohesis (Grinbla e al. (1984); McNichols & Dravid (1990); Masse e al. (1997)) ha suggess ha he bonus announcemen conveys new informaion o he marke in insances where managers have asymmeric informaion. Cash subsiuion hypohesis: While signaling hypohesis received massive suppor, (Ghosh & Woolridge (1988); Banker, Das, and Daar (1993) floa cash subsiuion hypohesis which suggess ha he firm can conserve cash by issuing bonus as a subsiue of cash dividend wihou facing adverse reacion from marke due o lowering or omiing cash dividend. Aenion geing hypohesis: Grinbla e al. (1984); Doran and Nachmann (1988) aribue posiive abnormal reurns associaed wih announcemen of bonus o aenion geing hypohesis suggesing ha bonus announcemen draws marke aenion and furher leads o demand for he sock of he firm announcing sock dividend. Liquidiy hypohesis: Lakonishok and Lev (1987) invesigae ha sock dividend announcemens inends o improve liquidiy by creaing addiional socks and ha should lead o more rading and greaer ownership dispersion in a firm. Sudies on bonus announcemens in Indian markes offer ineresing findings. Obaidullah (1992) repors posiive wealh effec associaed wih bonus issue. He also finds evidence for semi-srong form of EMH for Indian markes. Rao (1994) repors significan posiive price effec jus afer announcemen and finds evidence of semi srong form of marke efficiency in Indian markes. Mishra (2005) repors posiive abnormal reurn on and around announcemen day associaed wih bonus announcemen bu does no find any significan abnormal reurn on effecive day. He repors -0.10% reurn on effecive day which also provides significan suppor o singling hypohesis and evidence of semi srong form of marke efficiency from Indian markes. Joshipura (2009) also repors posiive abnormal reurns on and around announcemen of bonus and nohing around ex-dae. He furher repors negaive abnormal reurns in relaively longer pos effecive day window. Ray (2011) repors no price effec associaed wih bonus announcemens on or around announcemen or ex-dae. 3. Mehodology A. Sample & Daa source The sudy consiued 74 bonus issues by consiuen companies lised on CNX Nify 500 from he period 2008 o Bonus announcemen informaion is colleced from he Capialine daabase. Adjused daily closing price daa for each company over he period of 259

5 130 rading days before o and 10 rading days afer he ex-dae are used for he sudy. B. Measuring price effec The approach used o achieve above-menioned objecive is known as even sudy which is a sandard approach in he area of financial economics ever since i has been published by Fama e al (1969). An even sudy is designed o examine marke reacion of any even under observaion using abnormal reurn crieria. For his sudy, we have divided daa ino various windows. Choice of lengh for even and esimaion windows has remained as conenious issue among scholars over he years. Windows for he presen sudy are defined as given below. Even windows: AD-10 o AD+10 and ED-10 o ED+10: Even window AD-10 o AD+10 is used o check any leakage prior o formal announcemen of index changes. Absence of abnormal reurn on he announcemen and no before or afer ha can be inerpreed as evidence for semi-srong form of EMH if here is any informaion conen associaed wih such announcemen. ED-10 o ED+10 days is used as effecive window. Ideally, no abnormal reurn should be presen on or around ex-dae bu presence of any such reurn may be evidence agains semi-srong form of EMH or requires logical explanaion i is no he case. The firs sep in his process of deermining price or wealh effec is o calculae abnormal reurn. To perform he analysis, firs he equilibrium model for he normal sock reurn, ha is he expeced reurn if he even did no happen, mus be specified. Second, we need o idenify he even dae and he even window ha is he period over which he securiy reurns will be examined. The model is esimaed ouside his window, by choosing period of AD-30 o AD-130 days which is he sandard pracice in mos such sudies. The forecas errors over he even window measure he abnormal performance of reurns associaed wih he even. The normal model mos widely used in he even-sudies is he marke model which can be expressed as 2 R = α + β R + ξ i, i i m, i, (1) Where, R i, is he reurn on securiy i on day R m, is he reurn on a marke index on day α i is marke model consan βi is a parameer ha measures he sensiiviy of Ri o he benchmark marke index ξi, is a random error erm of marke model OLS regression wih expeced value of zero. The even daes are he announcemen dae (AD), he day when bonus is announced and effecive day (ED), he day on which sock goes ex-bonus. Marke model is esimaed using 260

6 esimaion window and abnormal reurns for every day during even windows are calculaed as below. AR = R α β R i, i, i i m, (2) In order o draw overall inferences for he even of ineres, he abnormal reurn observaions measured across securiies. The following measures of abnormal performance are used: Cumulaive Abnormal Reurn (CAR): cumulaive sum of sock i s predicion error (abnormal reurns) over he window ( 1, 2 ) 2 CAR = AR (3) i, Mean Abnormal Reurn (MAR): An average of abnormal reurns across he N firms on a day. 1 i, MAR = 1 N AR i, N i= 1 (4) Mean Cumulaive Abnormal Reurn (MCAR): average of he cumulaive abnormal reurns across observaions (firms); i is a measure of he abnormal performance over he even period, MCAR = 1 N N i= 1 CAR i, (5) C. Tesing for saisical significance The cross-secional -es using cross-secional variance is performed for boh MAR and CAR. The sample equaion for calculaion of cross secional variance for MAR is given below. S 2 = 1 N N AR MAR i ( ) i= 1 N 1 2 (6) A nonparameric generalized sign es based on sign of abnormal reurn is also employed. The hypohesis is abnormal reurns are independen across securiies and ha he expeced proporion of posiive abnormal reurns under he null hypohesis is 0.5. The es saisic is + N N θ = [ 05. ] ~ N ( 01, ) N 05. compued as where N is he sample size and N + is he number of cases where he abnormal reurn is posiive. This es is conduced o add robusness of he sudy. 261

7 4. Resuls and Discussion Table 1. Mean Abnormal Reurns wihin Announcemen Window Days -sa MAR posiive (ou of 74) z-score AD % AD % AD % AD % AD % 37 0 AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % 37 0 AD % AD % Table 1 repors he Mean Abnormal reurns (MAR) during he announcemen window. I is ineresing o noice ha he MAR is posiive and saisically significan wih value of 0.32% on AD-3. However, only 41 ou of 71 firms have posiive abnormal reurns for AD-3 and i is no significan on non-parameric sign es.. AD-2 is he day when marke ges he sniff of bonus announcemens and saisically significan posiive abnormal reurn of 0.25% wih. Posiive abnormal reurns for 44 ou of 74 firms ha is saisically significan on sign es as well. abnormal reurns becoming more and more significan wih higher values and more number of firms are observed wih posiive abnormal reurns. 0.25% of MAR is observed on AD-1 wih 46 ou of 74 firms wih posiive abnormal reurns. Presence of posiive abnormal reurns jus prior o announcemen day is probably indicaing some leakage of informaion or some early signals for marke paricipans on poenial bonus announcemen. However, he larges MAR of 0.5% is observed on he announcemen day wih 50 ou of 74 firms having posiive abnormal reurn and ha is highly significan and z value However, significan posiive MAR is no seen anywhere in he remaining lengh of announcemen window (AD+1 o AD+10). In fac, saically significan negaive MAR of 0.35% is observed and ha is significan wih 47 ou of 74 firms wih negaive abnormal reurns. 262

8 Table 2. Mean Cumulaive Abnormal Reurns wihin announcemen Window Days -sa MCAR posiive (ou of 74) z-score AD % AD % AD % AD % AD % AD % 37 0 AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % AD % Table 2 repors Mean Cumulaive Abnormal reurn (MCAR) wihin he announcemen window. MCAR also shows similar rend o MAR values and is significan boh wih and z saisics from AD-2 and reaches is pick on AD+1 wih MCAR of 2.18% wih 55 ou of 74 firms reporing posiive MCAR and ha is highly significan boh using parameric -es and non-parameric sign es. While MCAR remains saisically significan for he remaining lengh of announcemen window pos announcemen day (AD+1 o AD+10), i fizzles ou a a seady pace wih MCAR of 1.41% on AD+10 and only 44 ou of 74 firms wih posiive MCAR value compared o 2.18% MCAR wih 55 firms wih posiive MCAR value on AD+1. This indicaes ha bonus announcemen shows posiive marke reacion in anicipaion of such announcemen before one or wo days of such announcemen wih significan posiive response on he bonus announcemen day iself-he way i should be if markes are efficien in is semi srong form and bonus announcemen is perceived as a posiive informaion abou he sock. 263

9 Table 3. Mean Abnormal Reurns wihin Effecive Window Asian Journal of Finance & Accouning Days -sa MAR posiive (ou of 74) z-score ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % Table 3 repors Mean Abnormal Reurns (MAR) surrounding ex-bonus dae. While here is no significan posiive abnormal reurn observed wihin effecive window prior o ex-bonus dae, highly significan posiive abnormal reurn of wih MAR of 0.58% is observed in 46 ou of 74 firms and ha can be aribued o he spli like effec where invesors may perceive ha sock as more affordable and cheap and ha migh have creaed some demand. I is more eviden due o he fac ha beween ED+ 1 o ED+10 here are several days on which significan MAR is seen and ha means he posiive marke reacion seen on he ex-day was jus emporary and reversed in a very shor period of ime. If such posiive reacion is due o improvemen in liquidiy or more permanen posiive shif in demand such posiive abnormal reurns would have susained. 264

10 Table 4. Mean Cumulaive Abnormal Reurns wihin Effecive Window Asian Journal of Finance & Accouning Days -sa MCAR posiive (ou of 74) z-score ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % ED % Table 4 repors Mean Cumulaive Abnormal Reurns surrounding ex-bonus dae. MCAR urns significan posiive from ED-5 and remains ill ED+5 wih ED+1 repor highes MCAR of 1.53%. MCAR remains saically significan and posiive ill ED+5 bu i declines coninuously from ED+1 high levels. MCAR is 0.81% on ED+5 ha is saisically significan bu a a level ha is much below 1.53% observed on ED+1. MCAR keeps on declining from hereon and finally ends wih negaive 0.81% MCAR on las day of effecive window ha is ED+10, a complee reversal of rend. 5. Conclusion In his paper, we analyse marke reacion surrounding announcemen and ex-bonus days in pos global financial crisis era in Indian markes. Our resuls show ha bonus announcemen leads o some buzz in he marke and i reacs posiively o such announcemens. If, marke is efficien in is semi-srong form, such posiive reacion associaed wih bonus announcemen should be resriced on announcemen day only, however, we can see ha marke ges some hin of such poenial announcemen a leas wo days before bu he bigges posiive marke reacion is observed on announcemen day iself and no on any of he following day in he 265

11 announcemen window. Tha indicaes ha bonus announcemen do carry posiive informaion conen and ha is geing refleced jus before and immediaely on is announcemen and ha provides suppor for informaion conen and some evidence of Indian sock marke is efficien in is semi-srong form. While, bonus announcemen does no change anyhing subsanially, capializaion of reserve is probably considered as a posiive sign by he marke as ha indicaes ha he firm announcing bonus is confiden of serving higher capial base for disribuing fuure dividends and also he fac ha i may no need reserves o deep ino for disribuing cash dividends especially in bad imes. Posiive marke reacion is observed on he ex-bonus dae bu fizzles ou immediaely afer ha and resuls in reversals by he end of effecive window ha indicaes ha such reacion is only on accoun of some overreacion on he ex-day and ha reverses iself soon afer. Overall, our sudy concludes ha bonus announcemen does carry posiive informaion conen and ha leads o posiive marke reacion on is announcemen and such reacion is no following hrough beyond announcemen day and ha endorse ha Indian sock marke is efficien in is semi-srong form. Besides, posiive marke reacion on ex-bonus day is jus overreacion by marke paricipans and i reverses iself immediaely hereafer. The resuls are consisen wih oher sudies in Indian markes by Mishra (2005) and Joshipura (2009), where hey repored significan posiive price effec on announcemen day iself. However, he resuls of his sudy are differen from hose sudies on ex-day reurns-hose sudies did no repor any posiive price effec on ex-day, in fac Mishra (2005) repors negaive reurn on ex-day whereas, presen sudy repors posiive reurn on he ex-bonus day. However, such posiive reurns reverse immediaely and hence no significan by any means. Resuls of presen sudy are no consisen wih Ray (2011) as he repors no price reacion surrounding announcemen as well as effecive dae. To summarize, resuls of he presen sudy suppor signaling hypohesis and provides evidence ha Indian markes are efficien is semi srong form wih small leakage of informaion peraining o he bonus announcemen jus prior o formal announcemen. References Balachandran.B, F. a. (2004). Furher Evidence on he Announcemen Effec of Bonus Shares in an Impuaion Tax Seing. Golbal Fiancial Journal, 15(2), , hp://dx.doi.org/ /j.gfj Ball, Ray; Brown, Philip; Finn, Frank J. (1977, Ocober). Share Capializaion Changes, Informaion and he Ausralian Equiy Marke. Ausralian Journal of Managemen, 2(2), , hp://dx.doi.org/ / Banker. R., S. Das, and S. Daar. (1993). Complemenariy of Prior Accouning Informaion: The Case of Sock Dividend Announcemens. Accouning Review, 68(1), Doran, D.T. and Nachmann R. (1988). The Associaion of Sock Disribuion Announcemens and Earnings Performance. Journal of Accouning, Audiing and Finance, 3(2),

12 Foser III, T. W., and Vikery, D. (1978). The informaion Conen of Sock Dividend Announcemens. Accouning Review, 53(2), Ghosh, C., and Wollridge, J. (1988). An Analysis of Shareholder reacion o Dividend Cus and Ommisions. Journal of Financial Research, 11(4), Grinbla, M. S., Masulis, R. W., and Timan, S. (1984). The Valuaion Effecs of Sock Splis and Sock Dividends. Journal of Financial Research, 13(4), Joshipura M. (2009). Price and Liquidiy Effecs of Bonus Announcemens: Empirical Evidence from Indian Sock Marke. IUP Journal of Applied Finance, 15(11), Lakonishok, J., and Lev, B. (1987). Sock Splis and Sock Dividends: Why, Who and When. Journal of Finance, 42(4), , hp://dx.doi.org/ /j b03939.x. Lijleblom, E. (1989). The Informaional Impac of Announcemens of Sock Dividends and Sock Splis. Journal of Business Finance and Accouning, 16(5), , hp:/dx.doi.org/ /j b00047.x. Masse, I., Hanrahan,J.R. and Kushner, J. (1997). The Effec of Canadian Sock Splis, Sock Dividends and Reverse Splis on he Value of he Firm. Quarerly Journal of Business and Economics, 36(4), Mcnichols, M. and Dravid, A. (1990). Sock Dividends, Sock Splis, and Signaling. Journal of Finance, 45(3), , hp://dx.doi.org/ /j b05109.x. Mishra, A. (2005). An Empirican Analysis of Marke Reacion Around he Bonus Issue in India. Working Paper( ). Mohany, P. (1999). Dividend and Bonus Policies of Indian Companies: An Analysis. Vilalpa: The Journal of Decision Makers, 24(4), Obaidullah, M. (1992). How Do Sock Prices Reac o Bonus Issues? Vikalpa: The Journal of Decision Makers, 17(1), Papaioannou, G. J., Travlos, N. G. and Tsanarakis, N. V. (2000). Valuaion Effecs of Greek Sock Dividend Disribuions. European Financial Managemen, 6(4), , hp://dx.doi.org/ / x Rao, S. N. (1994). The Adjusmen of Sock Prices o Corporae Financial Policy Announcemens. Finance India, 8(4), Ray, Kousubh Kani. (2011). Marke Reacion o Bonus Issues and Sock Splis in India: An Empirical Sudy. IUP Journal of Applied Finance, 17(1), Woolridge, R. (1983). Sock Dividends as Signals. Journal of Financial Research, 6(1),