Announcement Effects of Bonus Issues On Equity Prices: The Indian Experience

Indian Journal of Finance and Research
42
Announcement Effects of Bonus Issues on

Equity Prices : The Indian Experience
VANDANA GUPTA*
Abstract
This paper has examined the announcement effects of bonus issues on equity share prices in India during the six-year period January 1, 1995 to
December 31, 2000 with a view to testing the semi-strong efficiency of the
Indian stock market. Using a sample of 145 bonus issues, the announcement effects have been studied in terms of the event study methodology.
The results reported here are somewhat different from those reported for
the developed and developing capital markets where the adjustment of share
prices to events of this type seems to have taken place in a relatively shorter
time period in comparison to the Indian market. However, the results are
supportive to the hypothesis that the Indian stock market is semi-strong
efficient.
Introduction
Stock market efficiency has now become a
central paradigm in the finance literature for
explaining share price behaviour. The efficient market theory has been developed to
explain the observed randomness of stock
price behaviour in the late sixties and early
seventies. In the context of stock markets,
the term efficiency has been used in a rather
restricted sense to reflect only the informational efficiency of such markets (1). Accordingly, a market is said to be efficient if it reflects all available information into the stock
prices. The efficient market theorists believe
that the process of adjustment of stock prices
to information is very quick. Thus, market
efficiency has two dimensions: (i) the set of
information that the market reflects into the
prices and (ii) the speed and quality of adjustment of prices to new information. Accord__________________
*
Sr. Lecturer, Department of Commerce, Deen
Dayal Upadhyaya College, University of Delhi,
Delhi.
ingly, three levels of efficiency have been postulated in the literature (a) the weak form
(b) the semi-strong form and (c) the strong
form. They tend to describe different degrees
of market efficiency according to the type of
information being reflected in prices.
In the weak form, the information set
includes information contained in past prices
of the security under consideration while for
semi-strong efficiency it comprises all publicly available information. In the strong form,
it refers to both publicly and privately available information.
The second aspect of market efficiency
relates to the speed of adjustment of prices
to new information. According to Ray Ball
et al., [1989] the degree of efficiency
shown by a market is measured by the speed
with which the market incorporates the new
information into its price structure. The
efficient market theorists postulate that in
an efficient market the speed of adjustment
of prices to new information is very rapid.
The three levels of efficiency, however,

are not independent of one another. That is
to say if the market is efficient in the semistrong sense, it must be efficient in the weak
sense also as prices are one form of published
information. Further, if past series of prices
could be used to predict future prices, it would
imply that the information contained in past
prices has not been fully reflected into the
current prices. Similarly, if the market is efficient at the strong sense, it must also be
efficient at the semi-strong and weak levels;
otherwise prices are not reflecting all relevant
information. The three forms of EMH, therefore, tend to describe different levels of market efficiency. In an efficient market, thus,
the stock prices are not only good estimates
of real worth of securities, but also the best
available at any point in time. In such an
environment, therefore, one cannot use available information to obtain consistently higher
than normal returns on investment.
The efficient market hypothesis has been
tested extensively in all its forms as far as
developed and developing capital markets are
concerned during the past three decades or
so (2). As far as the Indian stock market is
concerned, there have been some studies that
have examined the weak level efficiency of
the market. The major contributors to this
research have been Rao and Mukherjee
[1971], Sharma and Kennedy [1977], Sharma
[1983], Yalawar [1985] and Gupta [1985].
Gupta [1989] has documented the earlier
studies of the weak level efficiency of the Indian stock market. Rao and Geetha [1996]
examine the efficiency characteristics of the
Indian market for a more recent time period.
In general, the empirical results support the
weak level efficiency of the Indian stock market.
In recent years, some efforts have also
been made to test the semi-strong form efficiency of the Indian stock market using accounting information such as dividend announcements, earnings announcements, bonus issues, rights issues, mergers etc. The
43
major contributors to this research have been

Ramachandran [1985], Subramanian [1989],
Obaidullah [1990, 1991, 1992], Srinivasan Rao
[1993], Sarma [1993], Narayan Rao [1994], Rao
and Geetha [1996], Chaturvedi [1997],
Agarwal and Singh [2001]. The studies reported mixed results in that some of them
supported the semi-strong level efficiency of
the Indian stock market while the others do
not.
Some studies have also reported anomalous price behaviour in the Indian stock market such as month of the year effect, day-ofthe-week effect, etc. The major contributors
to this research have been Chowdhury [1991],
Poshakwale [1996], Arumugum [1997, 1998],
Anshuman and Goswami [1997], Karmakar
and Chakraborty [2000] and Amanulla and
Thiripalraju [2001].
However, the Indian capital market has
witnessed fundamental and structural
changes during the past decade or so as a
result of the economic reforms initiated by
the Government since 1991. The major objectives of these reforms have been to improve market efficiency, enhancing transparency, checking unfair trade practices, and
bringing the Indian capital market up to international standards.
Further, several changes have also taken
place in the operations of the stock markets
such as automated on-line trading in exchanges enabling trading terminals of the
National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE) to be available across
the country; reduction in the settlement period, opening of the stock markets to foreign
portfolio investors etc. In addition, derivative products on two of its principal existing
exchanges viz., BSE and NSE have also been
introduced in India in June 2000 to provide
tools for risk management to investors.
Therefore, in such a changed environment,
it becomes imperative that a study be undertaken to examine the semi-strong form efficiency of the Indian market. It is with this
44
motivation that the present study has been

undertaken.
Objectives of the Study
The primary purpose of the study is to examine the announcement effects of bonus issues
on equity share prices in India in order to
test whether the Indian stock market is efficient in the semi-strong form or not during
the recent six-year period January 1, 1995 to
December 31, 2000. The remaining paper is
organized as follows: Section II discusses the
data employed and the methodology followed
in the study while section III presents and
discusses the empirical results. The final section IV presents the summary and conclusions of the paper.
Data and Research Methodology
The Data
The data used in the study consist of a sample
of 145 bonus issues made by select listed companies in India during the recent period from
January 1, 1995 December 31, 2000. In order to examine the announcement effects of
bonus on equity prices, daily price data for
these issues have been employed using an
estimation window of -225 days to -31 days
before the event. The event date used in
the study is the date of board meeting, which
considered the bonus issues. This date has
been designated as t=0 (the announcement
date) and has been referred to as the event
date. The study has utilised an event window of 61 days; 30 days before and 30 days
after the event.
Proxy for Market Portfolio
The BSE 100 Index with 1983-84 as the base
year has been used as a surrogate for the
market portfolio as it is a broad based index.
It has also been a widely accepted market
proxy amongst investment researchers as

well as practitioners in India. The index is
based upon 100 actively traded equity shares.
The method of compilation of this index is
the same as used by the Standard & Poor,
USA in the construction of their price indices (3).
Research Methodology
The announcement effects of bonus issues
on equity share prices during the study period have been examined by using the famous
event study methodology. A brief discussion of the event study methodology is now
presented.
Event Study Methodology
The event day for each company was taken
as the date of Board of Directors Meeting
in which the decision to issue bonus was
taken. The study has used an event window
of 61 days centered on the event day to
study the announcement effect of bonus
issues on equity share prices. The window
period has been designated as -30, -29, -28,
-1 as the 30 days prior to the event, 0
as the event day, and +1, +2, +3, ... +30
days after the event.
The study has utilised the market model for
estimating the expected returns for sample
companies. The parameters of the model have
been estimated over -225 to -31 days before
the event day (estimation window). The proxy
used for the market portfolio is the BSE 100
(198384 =100) as it is a broad-based index
and has been widely accepted as a market
proxy amongst investment researchers as
well as practitioners in India. Earlier this
index was known as the BSE National Index.
The daily returns for each sample company
have been computed for the estimation window period and for the event window period
as:
Rit = (Pit- Pit-1) / Pit-1

Where Pit and Pit-1 are the respective daily
prices for company i at time t and t-1. Analogously, the actual returns for the market are
also computed as:
Rmt = (It -It-1)/ It-1
Where It and It-1 are the respective daily index values at time t and t-1.
The abnormal return for each of the
sample companies for the window period has
been computed by subtracting the expected
return from the actual return. The expected
returns on the sample stocks have been estimated using ordinary least square method
for the market model given in the following
equation:
Rit = i +iRmt + it
Where, Rit is the observed daily return for
the share of a company i at time t,
Rmt is the observed daily returns for the
market index at time t,
i is the estimate of the intercept for company i,
i is the estimate for beta of share of company i, and
it is the independently and identically distributed residual error term.
The abnormal returns for company i on day t
have been calculated as:
ARit = Rit - i - i Rmt
Normally, we look at the average effect of
the announcement of a particular event on
share prices rather then examine each firm
separately. This is because other events are
occurring and averaging across all firms
45
should minimise the effect of these other

events, thereby allowing a better examination of the event under study. Therefore, we
have computed the average abnormal return
on event day t (AARt), by dividing the aggregate abnormal returns for all sample companies on day t by the sample size N:
N
(AARt) = ARit/N
i=1
Next, the cumulative average abnormal returns (CAARs) for various periods have been
computed by adding the individual days abnormal return from the beginning (or from
any day) of the period to some specified period. For instance, the entry for -20 would be
the sum of the daily average abnormal returns for days -30 to -20 and the entry for -10
would be the sum of the average daily abnormal returns for -30 to -10. Z statistic has
been used for testing the significance of both
AARs and CAARs. In bonus ratio-wise classification, where sample size becomes less than
30, t-statistic has been used for testing the
significance of both AARs and CAARs.
Testable Hypotheses
The study attempts to test the following hypotheses concerning the announcement effects of bonus issues on equity prices:
It is hypothesized that around the time
of capitalization changes in the form of
bonus issues, any systematic share price
revision is due to information concerning future cash flows, rather than due to
the bonus issues.
Bonus issues have no significant impact
on abnormal returns over the event window. Thus, the null hypothesis is that
average abnormal returns over the event
window are not significantly different
from zero.
It is hypothesized that adjustment of
46
stock prices to new equilibrium prices and

expected returns take place at or before
the arrival of news concerning bonus issues and that above or below equilibrium
expected returns do not occur thereafter.
Empirical Results
This section is devoted to the discussion of
the empirical results relating to announcement effect of bonus issues on equity share
prices with a view to testing whether the Indian stock market is semi-strong efficient or
not during the study period. However, before
we discuss the results it will be worthwhile
to note as to what bonus shares are.
Bonus shares are issues of additional
shares free of charge to the existing shareholders in proportion to the shares already
held by them. A certain amount is transferred
through capitalisation of reserves etc. to
share capital without the total capital and the
owned funds employed in the business being
affected in any way. In other words, a bonus
issue does not result in the acquisition of any
new funds by the company and merely represents the rearrangement of the existing
capital structure. In effect, it is merely an
accounting entry whereby the reserves are
capitalised. As such, they enable the capital
structure to reflect truly the capital employed
and shareholders equity in the company.
Thus, bonus issues do not have any direct
cash flow implications for the value of the
firm and the price of its shares. Despite this,
they may contain useful information about
future dividends and future cash flows
thereby affecting share prices.
Empirical Results : Announcement
Effect (Full Sample)
The results relating to announcement effect
of bonus issues on equity share prices are
now presented and discussed. Table 1 gives
the AARs and the CAARs for the window pe-
riod in respect of all the 145 bonus issues.

In an efficient market, one would normally expect an abnormal return on the day
of the announcement (t=0) of bonus issues,
but not on other days. However, some abnormal returns have also been reported on
the days surrounding the announcement day.
In general, abnormal return after the announcement is either due to information taking time to be reflected in share prices or the
announcement taking place so late in day
zero, possibly even after the closure of markets that its effect can only be reflected in
prices on the day following the announcement.
An examination of Table 1 reveals that
the AARs before the announcement day (-30
to -1 day) are positive for 21 days out of 30
days and negative for 9 days. Of these, 11 are
statistically significant at 1% level. Interestingly, AARs for -1 to -7 days before the announcement day are all significant. The CAAR
for the above seven days before bonus announcement is 10.1% and is significant
(Z=12.7). There are four more days when
these returns are significant. They are -9, 12, -15, and -23 day before the announcement
day. In a semi-strong efficient market, one
would expect that the effect of release of information on share prices would take place
much before the actual announcement rather
than after the release of information regarding bonus issues. Surprisingly, on the day of
the event no significant abnormal return has
been found thereby indicating that the market has already anticipated the announcement of bonus shares and had reacted much
earlier than on the day of announcement.
After the announcement day, abnormal
returns are negative for 25 days and positive
only for 5 days. Of these, seven of them are
significant. Interestingly, the AARs for the
first three days after the announcement (+1,
+2, and +3 day) are negative but significant,
thereby indicating that the market has over
reacted earlier and has corrected its over

reaction during these three days. The CAAR
for the above three days post bonus announcement is -1.5% and is significant (Z= -4.74).
For all other days after the event excepting
day +7, the AARs are insignificant as expected. The CAAR for the above seven days
post bonus announcement is -2.7 % and is
significant (Z= -4.31). Note that AARs for three
more days i.e. for day +28, +29, and +30 after
the announcement are also negative but significant.
Table 1 Abnormal Returns Around Bonus Announcement: (19952000) Full Sample,
N=145
__________________________________________________________
Event
AARs (%)
Zvalue
CAARs (%)
% of Cos.
withPositive
AARs
__________________________________________________________
47
3
-0.5594
-2.3162*
10.6011
37.93
-0.2230
-0.3068
10.3781
46.90
-0.0229
0.3937
10.3552
49.66
-0.2013
-0.6065
10.1539
46.21
-0.7505
-2.6767**
9.4034
35.86
-0.8303
-1.1875
8.5731
43.45
0.0999
-0.1537
8.6730
44.83
10
-0.2896
-0.9006
8.3834
42.76
11
-0.2193
-0.3624
8.1641
50.34
12
0.1820
0.4587
8.3461
51.03
13
-0.7012
-1.0331
7.6449
43.45
14
0.1116
0.3717
7.7565
50.34
15
-0.2851
-1.3553
7.4713
44.14
16
-0.4181
-1.0234
7.0533
42.76
17
-0.1606
-0.9442
6.8927
41.38
18
-0.2524
0.1586
6.6403
46.21
19
-0.5634
-0.2617
6.0769
45.52
20
-0.2776
-0.5797
5.7993
42.76
21
-0.8183
-1.6589
4.9810
42.07
22
-0.3742
-0.7463
4.6068
39.31
-0.0814
-0.2847
-0.7607
-0.1502
4.5253
4.2407
51.03
40.69
-30
0.1965
0.7126
0.1965
52.42
-29
-0.5186
-1.6066
-0.3221
40.69
23
24
-28
0.3739
1.7343
0.0518
52.41
25
-0.4592
-1.3065
3.7814
51.72
-27
0.0485
0.2008
0.1003
44.14
26
0.0810
1.1026
3.8624
42.76
-26
-0.1433
0.0218
-0.0430
44.83
27
0.2117
0.1181
4.0741
47.59
-25
-0.4352
-0.8099
-0.4782
47.59
28
-1.2341
-3.4373**
2.8400
37.24
-24
-0.6715
-0.7827
-1.1497
44.14
29
-0.7378
-2.0806*
2.1021
36.55
-23
0.5834
2.7745**
-0.5663
55.86
-22
-0.3490
-1.0191
-0.9153
37.93
-21
0.1583
0.2004
-0.7570
42.76
-20
-0.1645
-0.3649
-0.9215
44.14
-19
0.3741
0.1520
-0.5474
48.28
-18
0.1974
-0.3035
-0.3500
46.90
-17
0.0839
0.0979
-0.2661
44.83
-16
-0.0653
0.8487
-0.3314
47.59
-15
0.8410
2.6302**
0.5096
51.72
-14
-0.2876
-0.7788
0.2220
48.97
-13
0.4885
1.0778
0.7105
46.90
-12
0.6879
2.7676**
1.3984
48.97
-11
-10
-0.1333
0.1931
1.7997
1.1829
1.2651
1.4582
45.52
51.03
-9
0.8021
3.0249**
2.2604
54.48
-8
0.2549
1.3252
2.5152
51.03
-7
1.1060
3.3624**
3.6212
54.48
-6
0.8611
3.1701**
4.4823
48.28
-5
1.6228
3.5786**
6.1051
51.03
-4
0.6961
3.9888**
6.8012
52.41
-3
2.4375
7.1463**
9.2388
60.00
-2
2.3195
7.9585**
11.5582
60.00
-1
1.0243
4.3662**
12.5826
51.03
-0.4995
-0.8496
12.0831
42.76
-0.0664
-2.4596*
12.0167
51.03
-0.8563
-3.4292**
11.1604
46.21
30
-0.9664
-3.6482**
1.1357
45.52
__________________________________________________________
* Significant at 5% level.
** Significant at 1% level.
Elton and Gruber [1996] have provided a possible explanation for the observed average
abnormal returns before actual announcement of an event. They argue, abnormal
returns prior to the announcement day can
come from three sources. First, the fact that
an important announcement will take place
is often released to the public prior to the
announcement, and the news release that an
announcement will take place and the way
the release is handled may convey information. Thus, the release of the message to
analysts and the financial press that there
will be an important announcement at press
conference may convey important information to them. If this is so, in an efficient market, this should be reflected in share prices
much before the actual announcement takes
place.
48
They further argue, if the announcement is at the discretion of the firm, it may
be partially caused by prior abnormal returns In such a situation, this type of announcement will show abnormal returns
prior to the announcement day.
The third possible cause for abnormal
returns before the announcement day could
reflect leakage of information by those
having access to it. In the Indian context,
this possibility is quite high. As mentioned
earlier, that we have taken the date of Board
Meeting as the day of the event. In India,
companies are required to give one-week
notice of the meeting to the Board Members.
The agenda papers have to be prepared and
sent along with the notice of the Board
Meeting. There is every likelihood that those
associated with this work may leak the
information to someone known to them.
Therefore, the observed significant average
abnormal returns for a period of seven days
prior to the event day may be the effect of
the prevalence of this phenomenon.
Thus, we find that there are significant
abnormal returns for seven days prior to bonus announcements. However, on the announcement day, there is no significant average abnormal return. The AARs for the first
three days after the announcement of bonus
issues are negative but significant, thereby
indicating that the market has over reacted
earlier and has corrected its over reaction
during these three days.
In sum, the results reported here are consistent with market efficiency and are in tune
with those reported by other researchers. The
behaviour of AARs was found to be in accordance with expectation thereby lending support to the hypothesis that the Indian stock
market is semi-strong efficient.

Announcements Effect : Bonus RatioWise
The bonus ratios followed by Indian companies varied during the sample period. In order to examine whether the bonus ratios followed by companies reflect different
behavioural pattern on share prices, bonus
issues have been classified in three broad
categories based on their ratios. Of the 145
companies, 79 (55%) issued bonus shares in
the ratio of 1:1 or more, 51 companies (35%)
declared bonus in the ratio of 1:2 or more,
the remaining 15 companies (10%) issued
bonus shares with a ratio of less than 1:2.
This section, therefore, examines the announcement effect of bonus issues on share
prices according to bonus ratios. Tables 2, 3
and 4 respectively give the results for the
above three categories of bonus issues.
Table 2 gives the results for bonus issues
with a ratio of 1:1 or more. It may be observed that the AARs on four days prior to
the event day, i.e. -1, -2, -3, -4 are positive
and significant. The CAAR for all these four
days is 7.99% and has been found to be significant (Z=11.38). The CAAR for seven days
before bonus announcement is 10.5% and is
significant (Z=2.70). One also notices that the
abnormal returns for the -9th, -23rd, and 28th day prior to the announcement day are
also positive and significant at 1% level. This
again indicates that the market had anticipated the declaration of bonus shares and
therefore, had reacted to such information
before the date of announcement. On the day
of announcement, there is no significant abnormal return as before. However, after the
declaration there are abnormal negative returns in respect of day 6, day 7, day 8 and day
30 which are all significant thereby indicating that the market has over reacted to bonus announcements earlier. The CAAR for
the three-day period (+6, +7, +8 days) is - 2.99%
and is significant (Z =-3.88).
49
21
22
23
24
25
26
27
28
29
30
Table 2 Bonus Ratio -Wise Abnormal

Returns Around Announcement: Full
Period
Bonus Ratio 1:1 or more (100% or
more bonus), N=79
__________________________________________________________
Event
Day
AARs (%)
Z-value
CAARs (%)
__________________________________________________________
-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
13
14
15
16
17
18
19
20
0.2046
-0.5639
1.0732
0.1839
0.0067
-0.4354
0.0286
1.0562
-0.3386
0.7883
0.5813
0.5855
0.2167
0.3381
0.3678
0.0530
-0.4161
0.8885
0.5090
0.1906
-0.1988
1.0049
0.3625
0.5807
0.8470
1.0355
0.3788
3.4081
2.6918
1.5075
0.0547
1.0535
-0.0968
0.0991
-0.5064
0.5465
-0.7647
-1.0341
-1.1857
0.0527
-0.3015
0.1441
0.6112
-0.6288
0.2315
-0.2474
-0.2564
0.2433
0.1170
-0.1589
-0.4832
0.5848
-1.3634
2.8612**
0.6399
0.4707
-0.4496
0.5487
3.0077**
-0.4071
1.4977
1.4644
0.7159
-0.2946
0.2077
0.6720
0.9709
-1.0123
1.7400
1.8218
1.4991
0.1216
2.9878**
0.9064
1.4472
1.3293
1.0148
2.0393*
8.1873**
7.1333**
5.4094**
0.1755
0.9221
-0.7676
-0.6269
-0.4124
0.9627
-2.0683*
-2.6446**
-2.0039*
-0.0627
-0.7348
0.4886
0.7226
-0.3080
0.7480
-0.8374
-0.5158
0.0258
1.2573
0.1764
-0.5422
0.2046
-0.3593
0.7139
0.8978
0.9045
0.4691
0.4977
1.5540
1.2153
2.0036
2.5850
3.1704
3.3871
3.7252
4.0930
4.1460
3.7299
4.6184
5.1274
5.3181
5.1192
6.1242
6.4866
7.0673
7.9143
8.9498
9.3286
12.7367
15.4284
16.9360
16.9907
18.0442
17.9474
18.0465
17.5401
18.0866
17.3220
16.2879
15.1022
15.1549
14.8534
14.9975
15.6087
14.9799
15.2113
14.9639
14.7075
14.9508
15.0678
14.9088
14.4256
-0.4483
-0.2603
0.3477
-0.1059
-0.8803
-0.0894
0.0588
-0.4317
-0.4818
-1.1927
-1.3338
-0.1233
-0.3224
-0.0061
-1.8527
0.2288
-0.1214
-1.3155
-1.3053
-3.5444**
13.9774
13.7171
14.0648
13.9589
13.0786
12.9892
13.0480
12.6163
12.1345
10.9418
__________________________________________________________
*
Significant at 5% level.
* * Significant at 1% level.
Table 3 shows the results for bonus issues

with a ratio of 1:2 or more. An examination
of the table would indicate that the excess
returns for none of the three days before the
event day, i.e. -1, -2, -3, are significant. In
contrast, the excess returns for -4, -5, -6, -7
days are all positive and significant at 1%
level. The CAAR for these four days is 6.12%
and is significant (Z=7.12). In addition, the
CAAR for seven days before the bonus announcement is 7.60% and has been found to
be significant (Z=6.28). One also notices that
abnormal returns for the -12th, -15th, and 20th day before the announcement day are
also positive and significant at 1% and 5%
level respectively. This again indicates that
the market had anticipated the announcement of bonus shares and therefore, had reacted to such information before the date of
announcement. Here, too, there is no abnormal return on the day of announcement.
However, after the declaration there are abnormal negative returns in respect of day 1,
day 2, day 3 and day 28 which are all significant thereby indicating that the market had
over reacted to bonus announcement earlier.
The CAAR for the three-day period (+1, +2,
+3 days) is -4.9% and is significant (Z= -6.72).
Table 3 Bonus Ratio -Wise Abnormal Returns
Around Announcement: Full Period
Bonus Ratio 1:2 or more (50% or more
bonus), N=51
__________________________________________________________
Event
Day
AARs (%)
Z-value
CAARs (%)
_____________________________________________________
-30
0.2154
0.2677
0.2154
50
-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
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-0.3931
-0.1391
-0.3185
-0.0215
-0.2739
-1.6051
0.3595
-0.1087
-0.5485
-1.2245
-0.3208
-0.2869
0.0536
-0.5772
1.7687
-0.7090
0.5972
1.9504
0.0173
0.3141
0.8774
0.7222
1.3988
1.0861
2.4786
1.1581
1.0720
0.4174
-0.0130
-0.8775
-1.6795
-1.7994
-1.4422
0.5095
-0.9240
0.3026
-0.4493
-0.2591
0.6593
-0.9162
-0.4473
-0.3825
-0.3542
-0.5064
-0.0939
-0.4200
-0.7230
-0.2919
-0.9106
0.0073
-0.4756
-0.3166
0.0285
-0.2844
-0.4791
-0.4244
0.1439
-1.0189
-0.5621
0.0466
-0.7948
-0.0655
-0.4887
-1.8638
1.3667
-0.8088
-1.5861
-2.5001*
-1.2053
-0.7127
0.2685
0.7350
2.4330*
-0.8861
0.3342
3.4199**
1.8625
1.5552
1.4473
1.8541
3.0949**
3.3086**
3.9473**
3.8879**
1.4235
1.4450
-0.4981
-0.7323
-4.7239**
-3.7903**
-3.1171**
0.2849
-0.6900
1.2467
-1.1793
0.4498
0.3992
-0.7759
-0.8510
-0.2022
-0.6015
-1.0235
-0.9416
-0.7302
-1.2409
-0.4202
-0.4435
-0.2495
-0.3182
-0.3897
0.1052
-0.2642
-0.3019
0.4099
-0.2217
-2.1251**
-0.1778
-0.3169
-0.6354
-0.6569
-0.9308
-2.5359
-2.1764
-2.2851
-2.8336
-4.0581
-4.3789
-4.6659
-4.6123
-5.1894
-3.4207
-4.1297
-3.5326
-1.5821
-1.5648
-1.2507
-0.3734
0.3488
1.7476
2.8337
5.3123
6.4704
7.5424
7.9598
7.9468
7.0693
5.3898
3.5903
2.1481
2.6576
1.7336
2.0361
1.5868
1.3277
1.9870
1.0708
0.6235
0.2411
-0.1132
-0.6195
-0.7135
-1.1335
-1.8564
-2.1483
-3.0590
-3.0517
-3.5273
-3.8439
-3.8154
-4.0998
-4.5789
-5.0033
-4.8594
-5.8783
29
30
-1.3677
-0.9356
-1.7015
-1.6800
-7.2460
-8.1817
__________________________________________________________
*
Significant at 5% level.
Table 4, which gives the results for bonus

issues with a ratio of 1:2 or less (less than
50%), would indicate that the excess returns
for only two days prior to the event day, i.e.
-1, -2 days are positive and significant. The
CAAR for these two days is 8.83% and is statistically significant (t=5.51). In addition, the
CAAR for four days before announcement is
11.60% and is statistically significant (t=4.57).
Again, this would indicate that the market
had anticipated bonus by sample companies.
Much of its reaction has taken place before
the actual announcement. Here, too, on the
day of announcement there is no significant
abnormal return. However, after the declaration there are abnormal negative returns
only in respect of day 28. Surprisingly, for
day +26, there is a positive return of 2.7%,
which is statistically significant.
Table 4 Bonus Ratio-Wise Abnormal Returns
Around Announcement : Bonus ratio
of less than 1: 2 (Less than 50%)
(1995-2000) N=15
__________________________________________________________
Event Day
AARs (%)
Z-value CAARs (%)
__________________________________________________________
-30
-29
-28
-27
-26
-25
-24
-23
-22
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
0.0898
-0.7065
-1.5651
0.5836
-1.3471
-0.9829
-1.1845
-1.1457
-1.2211
-0.7562
-0.4886
1.6235
1.7422
-1.1511
-0.6064
1.8373
1.8220
-1.9878
-2.6621
-2.3519
0.3800
-0.8301
-1.2598
0.6213
-0.8916
-0.5851
-0.2564
-0.7959
-0.7429
0.1107
0.1145
1.0522
1.0465
-0.6673
-0.2587
1.4635
1.5354
-1.2581
-1.8817
-1.2788
0.0898
-0.6168
-2.1818
-1.5982
-2.9454
-3.9282
-5.1128
-6.2584
-7.4795
-8.2358
-8.7244
-7.1009
-5.3587
-6.5098
-7.1162
-5.2790
-3.4570
-5.4448
-8.1070
-10.4588

-10
1.8463
0.5312
-8.6126
-9
-0.5216
-0.1206
-9.1342
-8
-1.9009
-1.3784
-11.0351
-7
2.8771
1.4264
-8.1580
-6
0.1710
0.7050
-7.9869
-5
1.8056
1.5192
-6.1813
-4
0.7966
0.5527
-5.3847
-3
1.9688
0.8049
-3.4159
-2
6.8259
5.7096** 3.4100
-1
2.0066
2.0794* 5.4166
0
-2.1332
-1.6944
3.2833
1
-0.4798
-1.0531
2.8036
2
-1.6494
-1.9113
1.1542
3
-1.0255
-0.0153
0.1287
4
-1.2208
-0.5328
-1.0921
5
0.0419
0.2872
-1.0502
6
1.0529
0.5620
0.0027
7
-0.2811
-0.0788
-0.2784
8
-0.9009
0.0771
-1.1793
9
-1.5537
-1.0700
-2.7330
10
1.9035
0.3169
-0.8295
11
-1.3577
-0.6792
-2.1872
12
-0.1596
0.1408
-2.3468
13
-2.2618
-1.3963
-4.6086
14
1.5812
1.3264
-3.0274
15
-1.1338
-0.5560
-4.1612
16
-1.2631
-0.6519
-5.4243
17
-0.3754
-0.7068
-5.7997
18
-2.0635
-1.6175
-7.8631
19
-1.5128
-0.4007
-9.3759
20
-0.1637
-0.0982
-9.5396
21
-3.9320
-1.5100
-13.4716
22
-1.1703
-1.3189
-14.6419
23
-2.7154
-1.8191
-17.3573
24
-1.2271
0.0341
-18.5844
25
1.8256
0.7465
-16.7587
26
2.6965
2.1471* -14.0622
27
1.2475
1.0549
-12.8148
28
-6.1914
-3.7497** -19.0062
29
0.0551
-0.3361
-18.9511
30
0.1209
-0.1109
-18.8302
__________________________________________________________
* Significant at 5% level
** Significant at 1% level.
In sum, one distinguishing feature of these

results is that there appears to be a four-day
pre-bonus announcement period in which significant abnormal returns have been generated in contrast to the seven-day pre-bonus
announcement period found for the overall
sample. In general, the over reaction by the
market before declaration has been corrected
during the one week after bonus announcement, thereby indicating that the Indian stock
51
market is semi-strong efficient. Thus, the

results reported here indicate that the
behavioural pattern of AARs and CAARs is
not very different for various bonus ratios.
Announcement Effects : Three SubSample Periods
The sample period of six calendar years from
1995-2000 has been sub divided into three
periods of two years each: sub-period I (199596), sub-period II (1997-98) and sub-period III
(1999-00) in order to see whether there is any
difference in reaction of share prices to bonus anncuncement. The corresponding results for these sub-period are given in Tables
5,6 and 7 respectively.
Table 5, which gives the results for the
sub-period I, shows that the average abnormal returns on seven days prior to the event
day, i.e.,-1, -2,-3, -4, -5, -6, and-7 are positive
and significant excepting for -1 day. The average abnormal return is also positive significant for day-11 and -15 days before bonus
announcement, CAAR for the seven-day (-1
to -7) period is 9.86% and is statistically
(Z=8.69) .This again indicates that the market had anticipated the declaration of bonus
shares by the sample companies and has reacted to it before the date of announcement.
On the day of announcement, there is no
significant abnormal return as before, However, after the declaration there are abnormal significant negative returns of 0.65% for
day 1 and 1.12% for day 2 respectively thereby
indicating that the market had corrected its
earlier over reaction.
An examination of Table 6, which gives
the results for the sub-period II, (1997-98),
reveals more or less the same pattern of bonus announcement on equity share prices.
Here, too, there are excess returns for the
seven day period before announcement. The
returns are not only positive but are also
statiscally significant excepting for -6 day.
CAAR for the above period (-1 to -7 days) is
52
10.89%, which is significant (Z=8.36). On the

day of announcement, there is no abnormal
return as before. However, there is a positive and sigaificant average abnormal return
for day +1 after the announcement. For day
+2 there is a negative average abnormal return of - 1%, which is found to be significant.
Table 7 gives the results for sub-period
III (1999-00) The results are more or less similar to those of other two sub-periods. However, positive abnormal returns are observed
during a five-day period, witch are significant
except for day-4 before the announcement
date. CAAR for this period of five days is 9.2%,
witch is significant (Z=4.89). On the announcement day, no significant abnormal return is
obsereved. This behaviour is similar to one
observed in other sub-periods and the full
sample.
In sum, the results reported here indicate more or less similar behvioural pattern
of AARs and CAARs in repect of all the three
sub-periods. In general, the observed abnormal resurns relate to the seven-day period
before bonus announcement. There are no
average abnormal retuens on the day of announcement. After the announcement, the
excess returns were nagative for few days,
which later taper of and were not different
from zero.
Table 5 Abnormal Returns Around Announcement : SubSample Period I
(1995-1996) N=69
__________________________________________________________
Event Day
AARs (%)
Z-value CAARs (%)
__________________________________________________________
-30
-29
-28
-27
-26
-25
-24
-23
-22
-21
-20
-19
-18
0.0898
-0.8-561
0.2219
0.5355
-0.0025
-0.4269
-0.8209
0.2677
-0.8814
0.2982
-0.6204
0.8154
-0.5389
0.5470
-1.3053
0.0408
1.6425
0.4122
-1.5550
-1.4912
1.6784
-1.5800
0.2999
-0.8368
1.2072
-0.9759
0.0898
-0.7662
-0.5444
-0.0089
-0.0114
-0.4383
-1.2592
-0.9915
-1.8729
-1.5747
-201951
-1.3797
-1.9186
-17
0.1803
0.2671
-1.7382
-16
-0.2478
0.8381
-1.9860
-15
0.4437
1.9610*
-1.5423
-14
0.3518
0.0529
-1.1904
-13
0.2003
0.3947
-0.9901
-12
0.1180
0.6915
-0.8721
-11
0.9325
3.7094**
0.0604
-10
0.2016
1.7643
0.2621
-9
0.2877
1.3446
0.5498
-8
0.2270
0.5448
0.7768
-7
0.8860
2.2287*
1.6628
-6
1.6934
3.6309**
3.3563
-5
0.7880
1.9735*
4.1442
-4
0.8576
2.9102**
5.0018
-3
2.7332
5.7342**
7.7349
-2
2.6276
5.8021** 10.3625
-1
0.2742
0.7038
10.6367
0
-0.9108
-1.5475
9.7259
1
-0.6531
-2.4262*
9.0728
2
-1.1283
-3.1033** 7.9445
3
-0.9045
-1.5751
7.0399
4
-0.1519
-0.0084
6.8880
5
-0.1008
-0.1530
6.7872
6
-0.7266
-1.0388
6.0606
7
-1.2191
-2.8914** 4.8415
8
-0.9503
-0.6293
3.8913
9
0.3140
0.5590
4.2053
10
-0.3959
-0.8470
3.8094
11
-0.2297
-0.4555
3.5796
12
0.0284
0.5820
3.6080
13
-0.3698
-0.4282
3.2382
14
0.1781
0.4221
3.4164
15
-0.1970
-1.3292
3.2194
16
-0.6676
-0.8292
2.5518
17
-0.4136
-0.7772
2.1382
18
-0.3870
0.0408
1.7512
19
-0.2623
0.3265
1.4889
20
-0.2098
-0.1423
1.2791
21
-1.1522
-1.7878
0.1269
22
-0.0465
-0.4325
0.0804
23
-0.6028
-0.5965
-0.5224
24
-0.3798
0.3028
-0.9022
25
-0.5606
-1.0240
-1.4629
26
0.1124
1.9085
-1.3504
27
-0.0158
-1.4245
-1.3663
28
-1.4670
-2.6316** -2.8332
29
-0.4024
-1.2435
-3.2356
30
-0.6174
-0.5359
-3.8530
__________________________________________________________
Table 6 Abnormal Returns Around Announcement : SubSample Period II
(1997-1998) N=43
__________________________________________________________
Event Day
AARs (%)
Z-value CAARs (%)
______________________________________________________

-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
13
14
15
16
17
18
19
20
21
22
23
24
25
26
0.6422
-0.0307
0.4683
0.0231
-0.3603
-0.7136
-0.5048
0.6687
-0.0293
0.3068
0.7942
0.5344
1.0643
-0.2638
-0.2979
0.9282
-1.1848
1.2969
0.8960
-0.6500
0.5385
0.9894
0.2316
1.8981
0.3947
1.8605
0.5645
2.0307
2.4822
1.6597
0.2951
0.5919
-1.0030
0.7024
-0.2788
0.9912
1.1588
-0.0877
0.0673
0.0691
-0.0828
0.3065
0.9111
-1.2325
0.9948
-0.4761
0.1440
0.2764
-1.0457
-0.6514
0.0801
-0.3670
-1.0559
0.9339
-0.5801
-0.8719
-0.3061
0.5433
-0.0813
2.0095*
-0.3888
-0.4872
-0.4008
0.8139
1.3836
-0.3674
-0.3448
1.6596
0.2137
0.1132
-1.0230
-0.5377
1.4865
-0.8372
0.7257
2.4935
-0.4838
0.1252
2.2915*
0.9104
2.2992*
1.4160
2.2244*
2.8856**
3.6562**
4.6770**
4.9473**
1.2280
-2.3746*
-2.3582*
-1.0129
0.0881
1.7066
0.9825
-0.4264
0.1687
-0.0945
-0.0426
0.6960
0.7107
-0.6561
1.7525
-0.2528
-0.5009
-0.1885
-0.7840
-0.2605
0.5345
-0.8912
-1.2302
0.5192
-0.8092
-1.6201
-1.1527
0.6422
0.6116
1.0799
1.1030
0.7428
0.0292
-0.4756
0.1931
0.1638
0.4706
1.2648
1.7992
2.8635
2.5997
2.3018
3.2300
2.0452
3.3421
4.2380
3.5880
4.1265
5.1159
5.3475
7.2456
7.6404
9.5009
10.1654
12.0961
14.5784
16.2381
16.5331
17.1250
16.1220
16.8244
16.5457
17.5369
18.6957
18.6079
18.6753
18.7444
18.6616
18.9680
19.8791
18.6466
19.6414
19.1654
19.3094
19.5858
18.5401
17.8887
17.9688
17.6018
16.5458
17.4797
16.8996
16.0277
15.7216
53
27
0.8795
1.2719
16.6011
28
-1.5967
-2.4258*
15.0045
29
-1.1957
-1.2566
13.8087
30
-0.7757
-3.0021** 13.0330
__________________________________________________________
Table 7 Abnormal Returns Around Announcement : SubSample Period III
(1999-00) N=33
__________________________________________________________
Event
Day
AARs (%)
Z-value CAARs (%)
_________________________________________________________
-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
13
-0.1612
-0.4488
0.5686
-0.9366
-0.1548
-0.0898
-0.5763
1.1322
0.3475
-0.3277
-0.4604
-0.7575
0.6072
0.3355
0.6192
1.5581
-0.4556
0.0378
1.6085
-1.6888
-0.2746
1.6338
0.3434
0.5337
-0.2714
3.0585
0.5300
2.3495
1.4632
1.7649
-0.6748
0.3028
-0.0962
-1.4819
-0.2989
-1.1814
-0.8751
-0.6345
-1.7491
-0.3078
-0.3367
-0.8824
-0.4469
-0.7018
0.0826
-1.3876
1.2827
-1.5103
0.0058
1.0083
-0.4136
1.8096
0.5673
0.3802
-1.4495
-1.6707
0.6455
0.9868
1.1810
0.9810
-0.7535
0.8603
1.9552
-1.0388
-0.2145
1.7807
0.9511
1.2009
-0.2215
2.1087*
0.8591
2.5149*
2.9539**
2.4874*
-0.9453
1.0631
-0.0090
-1.4215
-0.7316
-0.9014
-0.8908
-0.9433
-1.7719
-1.0227
-0.6145
-0.8956
-0.6912
-0.7976
-0.1612
-0.6100
-0.0414
-0.9780
-1.1328
-1.2226
-1.7990
-0.6667
-0.3192
-0.6469
-1.1073
-1.8648
-1.2577
-0.9221
-0.3030
1.2552
0.7996
0.8374
2.4459
0.7571
0.4825
2.1162
2.4595
2.9933
2.7219
5.7804
6.3104
8.6599
10.1231
11.8880
11.2132
11.5160
11.4198
9.9379
9.6390
8.4576
7.5825
6.9481
5.1989
4.8911
4.5544
3.6719
3.2250
2.5232
54
14
-1.1783
-1.8316
1.3447
15
-0.2207
-0.6304
1.1240
16
-0.6287
-0.3744
0.4954
17
-0.2010
-0.6404
0.2943
18
1.0628
1.1684
1.3571
19
-1.0782
-0.7233
0.2789
20
-0.8856
-1.6195
-0.6066
21
-0.7081
0.1252
-1.3148
22
-0.1711
0.4653
-1.4859
23
-0.3143
-1.3247
-1.8002
24
0.2993
0.1709
-1.5010
25
0.2905
0.5915
-1.2105
26
0.5194
0.8673
-0.6911
27
-0.1828
0.8556
-0.8738
28
-0.2747
-0.6310
-1.1485
29
-0.8427
-1.1290
-1.9912
30
-1.9446
-3.4454** -3.9358
__________________________________________________________
Summary and Conclusions

This paper has been aimed at examining the
announcement effects of bonus issues on equity share prices in India during the six-year
period January 1, 1995 to December 31, 2000
with a view to testing the semi-strong efficiency of the Indian stock market. The main
results of the study are summarised as follows:
The results for the full sample indicate
that there were significant abnormal returns for a seven-day period before bonus announcements. The CAAR for the
above seven days was 10.1% and was significant at 1% level (Z=12.8). There was
no abnormal return on the day of the
bonus announcement. The AARs for the
post three-day announcement period
were negative and significant, thereby indicating that the market had over reacted
during seven days prior to announcement
and had corrected its over reaction during these three days. CAAR for the threeday post bonus announcement period was
-1.5% and was significant (Z= -4.74) at 1%
level. There were abnormal returns on
the last three days of the window period.
The results reported here are somewhat
different from those reported for the developed and developing capital markets
where the adjustment of share prices to
events of this type seems to have taken
place in a relatively shorter time. However, in general, the results lend support
to the hypothesis that the Indian stock
market is semi-strong efficient.
In general, the results for three categories of bonus issues in terms of bonus
ratios are more or less similar in that
they depict the same behavioural pattern
of AARs and CAARs. However, a somewhat different pattern of AARs for these
three categories is noticed.
Significant abnormal returns were found
for four-day period (-1 to -4) before the
announcement day in respect of bonus
issues with ratio of 1:1 or more. In case
of bonus ratio of 1:2 or more, the AARs
were again found to be significant for fourdays prior to announcement but for different days. (-7 to - 4 days). However, for
bonus ratio of less than 1:2, significant
AARs were observed only for two days (2 to -1). These results are somewhat different from results of the full sample
where significant abnormal returns were
found for a seven-day (-1 to -7) pre-bonus
announcement period.
For any of the category of the bonus ratio, no significant abnormal returns were
observed on the day of the announcement. In the post-announcement period
the returns were negative for a few days
reflecting again, the corrective action
taken by the market on its over reaction in the pre-declaration period. The
adjustment process lasted for about a
week.
Overall, the results of sub-classification
also indicate that the behavioural pattern
of bonus announcements on equity share
prices is not very different for various
bonus ratios.
In sum, the results reported here are

consistent with market efficiency. The
behaviour of AARs was found to be in accordance with expectation thereby lending support to the hypothesis that the
Indian stock market is semi-strong efficient.
Notes
1.
2.
3.
The word efficiency can be interpreted in three

different ways, viz., (a) organisational (b)
allocational and (c) informational efficiency.
Some of the major US studies are: Samuelson
[1965], Mandelbrot [1966], Fama [1970, 1991],
Malkiel [1975] Fama at. el. (1969) and Fama and
French [1992]. For Australian & U.K. studies see,
Ball [1989], Firth and Keane [1986]. Also, See
Ariff and Johnson [1990] for studies relating to
Singapore etc.
It seems that the results are not likely to be affected when one notes that major stock indices
are highly correlated.
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