Market Reaction Around the Stock Splits and Bonus

Issues: Some Indian Evidence

By

Dr. Satyajit Dhar

Reader, Dept. of Business Administration,
University of Kalyani.
Ph: 9433463658(M)
Email: satyajitdhar@yahoo.co.in

&

Ms. Sweta Chhaochharia

Research Scholar
University of Kalyani
Ph: 9434139726 (M)
Email: sweta_ch04@yahoo.com

Electronic copy available at: http://ssrn.com/abstract=1087200

 Abstract
It is often argued that stock splits and bonus issues are purely cosmetic events. However, many studies have
found numerous stock market effects associated with bonus issues and stock splits. This paper examines the
effects of these two types of events for the Indian stock market. We use the event study methodologies. The
abnormal returns are calculated using the Capital Asset Pricing Model and then t-tests are conducted to test the
significance. Consistent with the existence literatures, the two events are associated with significantly positive
announcement effect. For bonus issues, the abnormal returns were about 1.8% and for stock splits, it was about
0.8%. On a whole, the paper finds evidence of semi-strong form efficiency in the Indian stock market.

Market Reaction around the Stock Splits and Bonus Issues: Some
Indian Evidence

Stock splits and bonus issues (stock dividends) continue to generate interest as none of them
have any 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 has shown that the market
generally react positively to the announcement of a stock split / bonus issue (Foster and
Vickrey (1978), Woolridge (1983), Grinblatt et al (1984), McNichols and Dravid (1990),
Masse et al (1997), Lijleblom (1989), Bar-Yosef and Brown (1977)). Numerous studies in
India have dealt with the information content of various types of announcements
(Ramachandran (1985), Obaidullah (1992), Rao (1994), Rao and Geetha (1996), Srinivasan
(2002), Budhraja I, Parekh P and Singh T (2004), and Mishra (2005)). However, no
contemporary study has investigated the comparative information content of the stock split
and stock dividend (bonus issue) announcements in Indian context. This deficiency provided
the primary impetus for this study.

The prime concern of this paper is to analyse the information impact of the announcement of
stock split and bonus issue for stocks listed on National Stock Exchange (NSE). The paper is
organized as follows. The next Section gives the conceptual and regulatory issues of stock
split and bonus issues in India. The 3rd Section presents a brief notion of Efficient Market
Hypothesis (EMH) and the possible price reaction to the announcement of stock split and
bonus issue in the light of EMH. The 4th Section presents the review of some relevant prior

Electronic copy available at: http://ssrn.com/abstract=1087200

studies. Section 5 describes the sample data and methodology employed in this paper. The
results of the study of the stock price behavior around the declaration days for stock splits
and bonus issues are presented in Section 6. The last Section contains a short discussion and
concluding remarks.

2. STOCK SPLITS AND BONUS ISSUES: CONCEPTUAL AND REGULATORY

ISSUES

Stock splits
A stock split simply involves a company altering the number of its shares outstanding and
proportionately adjusting the share price to compensate. The balance sheet items remain
same except that the total number of outstanding shares of the company increases
proportionately to the ratio of split. Split can occur at any ratio. The most commonly used
ratios are 2:1, 3:2, 5:4, 4:3 etc. After a two for one (2:1) split, each shareholder has twice as
many shares but each represents a claim on only half as much of the corporation’s assets and
earnings. Also they can happen in reverse, e.g. 10:1 which are called reverse split. The
announcement of a reverse split has been found to elicit a negative stock market response (
Wooldridge and Chamber, 1983). A notable difference between stock split and reverse split
is that, while regular splits may be ends in themselves as vehicles to correct stock
undervaluation, reverse splits do not aim at signaling the firm value but moving share prices
to a more attractive trading range. The information quality of reverse split is likely
inadvertent, and only a by-product of their original purpose (Nikos Vafeas, 2001). Reverse
split is not common among Indian companies.

In a stock split, the company announcing a stock split notifies the stock exchange, the record
date, after completing the legal and procedural formalities. The stock exchange accordingly
fixes the ex-dates, which generally comes few days earlier the record date. On the ex-date
and thereafter, the only market is in the post split shares.

Section 94(1)(d) of the Companies Act, 1956 allows every limited company to subdivide all
or any of its shares into shares of smaller amount than is fixed by the memorandum. The

3
Ministry of Finance, vide Circular No. 1/7/SE/81 dated January 22, 1983 had restricted to
change the face value at a denomination lower than Rs. 10 keeping them fixed at Rs. 10 or
Rs. 100. This concept of fixed par value was abolished by the SEBI vide Circular No.
SMDRP/ Policy/ Cir-16/ 99 dated June 14, 1999 that provided companies freedom to issue
shares in any denomination to be determined by them as long as it is not fractional by
amending their Memorandum and Articles of Associations. Thereafter, it was observed that
several companies were resorting to frequent splitting and consolidation within a short span
of time. To fill the existing loopholes, the Secondary Market Advisory Committee (SMAC)
has been set by SEBI as a standing committee to advice on maters related to secondary
market. The committee was reconstituted under the chairmanship of Dr. R.H. Patil. The
SMAC in its meeting held on October 9, 2003 discussed with many other things, the issue of
frequent changes in face value by listed companies. The SMAC deliberated on the aforesaid
issue and recommended that the provisions of the SEBI Circular No. SMDRP/Policy/Cir-16,
99 dated June 14, 1999, may be modified to include the following: -

(a) No listed company whose market price in the previous six months is less than Rs. 500 per
share can split the value of its equity share.
(b) If the company had gone in for split or consolidation, it would not be permitted to do it
again for a period of three years from the date of the last split/consolidation.
(c) The change in the par value (i.e. split or consolidation, as the case may be) will have to be
disseminated through the Websites of the stock exchanges and through EDIFAR for a
continuous period of one year, from the date of last split/ consolidation.
(d) This should be in addition to the condition stated in SEBI Circular dated June 14, 1999
referred above.
Recommendations of the Committee are no doubt, a welcome step for protecting the interest
of investors. But these are yet to be implemented.

Bonus issues
Bonus issues (equivalent to stock dividend in the US and scrip issues in the UK) are simply
distributions of additional stocks made to existing shareholders in proportion to their current
investment. A company can distribute bonus stocks out of retained earnings or accumulated

4
capital reserves. If a company distributes a bonus issue by using retained earnings, it makes
a book entry to allocate retained earnings into paid up capital in the stock holders’ equity
section of the company balance sheet. Alternatively, if a company decides to make a bonus
issue by using accumulated capital reserves, it adjusts the accumulated capital reserves into
paid-up capital. In both the cases the company does not receive any cash. They result in
each stock holder holding a greater number of stocks, but with more stocks on issue their
relative claim on the assets of the company is smaller. There is no effect on stock holder’s
proportional ownership of stocks, capital structure and financial position of the company.
Miller and Modigliani (1961) demonstrated theoretically that bonus issues along with other
types of dividends do not alter shareholder wealth. The modification triggered by the bonus
issue is that the number of outstanding shares is adjusted by the bonus issue ratio, therefore
the price of the share declines according to the same bonus issue ratio. The total market
value of the shares or the values of the shares that are held by each investor should remain
unchanged.
Companies are not required to take any specific approval from SEBI to issue bonus shares,
though they have to follow certain SEBI guidelines mentioned below:

ƒ Bonus shares can be issued only out of free reserves built out of the genuine profits or
share premium collected in cash only. Companies cannot issue bonus shares in lieu
of dividend or if it had come out with any public / rights issue in the past 12 months.
ƒ Bonus issue cannot be made on partly paid up existing shares.
ƒ It should be ensured that the company has not defaulted in payment of interest or
principal in respect of fixed deposits and debentures and in the payment of statutory
dues of the employees.
ƒ Memorandum and Articles of Association are required to be altered if they do not
provide the provision of bonus issue in respect of authorized share capital or
capitalization of reserves.
ƒ Companies are required to implement the bonus proposal within a period of 6 months
from the date of approval at the meeting of board of directors, and the new shares are
to rank pari-passu with the existing shares.

5
Stock split and bonus issues are similar in several aspects. In particular, they are both
corporate events in which each shareholder receives a certain number of new shares free of
charge, whereby the stock price is reduced accordingly. However, there is at least one
important difference between the two events that is often neglected in the literature. In the
case of a stock split, each old share is split into a number of new shares with a reduced par
value, leaving the total share capital unchanged. In the case of a bonus, a number of new
shares are received for each share owned. The new shares have the same par value as the old
shares, whereby the total share capital increases proportionately with the size of the bonus.
Brealey and Myers (1996, p. 419) characterize the difference between a stock split and a
stock dividend (bonus) in the following terms:
A stock dividend is very much like a stock split. Both increase the number of shares, and both reduce value
par share, other things equal. Neither makes anybody better off. The distinction between the two is a
technical one. A stock dividend is shown in the accounts as a transfer from retained earnings to equity
capital, whereas a split is shown as a reduction in the par value of each share.

3. EFFICIENT MARKET HYPOTHESIS AND STOCK SPLIT / BONUS ISSUES

Efficient Market Hypothesis (EMH) states that all relevant information is fully and
immediately reflected in a security’s market price, thereby assuming that an investor will
obtain an equilibrium rate of return. In other words, an investor should not expect to earn an
abnormal return. Fama (1970) identified three forms of market efficiency namely, the weak,
semi-strong and strong form. The weak from of efficiency suggest that current share prices
fully reflect any past information contained within past share prices. The semi-strong form
extends the notion of efficiency a little further and describes the situation where any
published information relating to a company will be reflected in its share price. The strong
form describes the situation where all relevant information, whether it is within the public
domain or outside the public domain, will be reflected in the price of a share. Subsequently,
Fama (1991) changed the categories and coverage of informational efficiency. According to
him, the first category (weak form), now covers the more general area of test for return
predictability, including work in forecasting returns with variables like dividend yields and
interest rates. Further seasonality in returns and volatilities of security prices are to be
considered under the theory of return predictability. He further continued that semi-strong

6
tests will now be called event studies and strong form tests will be called tests for private
information. In event studies, it is measured how rapidly security prices respond to different
items of news, such as an earnings or dividend announcement, news of a takeover, or
macroeconomic news. The study on stock price reaction for stock splits/ bonus issues is thus
based on test of semi-strong form of market efficiency.

The EMH of near perfect capital markets that renders only fleeting and non-systematic gain
and loss opportunities to investors has been criticized in recent years by the behavioral
finance literature. Because according to the behavioral finance, stock transactions are often
executed (in relation to known events such as stock issues, stock split, share buy-back) at
price levels that imply predictably high or low risk adjusted return. If these findings are
factually correct, they pose a challenge to the EMH, which predicts a lack of capital market
profit or loss opportunities due to the ability of investors rapidly and unbiasedly to interpret
information according to correct assessments of the underlying economic process. The
behavioral literature attributes its findings to various investors’ biases. Supporters of
efficient market argue that risk adjustment methods in behavioral finance are imperfect, data
mining may have occurred. According to them all the behavioral anomalies taken together
suggest an unbiased market at work and they asked for behavioral models that explain a
broader range of evidence (see Fama, 1998). On the other hand, Haugen (1999-2002)
responds from the behavioral camp by pointing out the superior powers of capital market
phenomena like momentum to predict and explain returns.

Although stock dividend and stock split, unlike most cash dividend and capital structure
changes do not directly affect the corporate cash flows, a large number of studies in Finance
give evidence on positive stock price reactions in response to such announcements. Still,
very little is known about the exact explanation for the positive announcement effect. Ball,
Brown and Finn (1977) investigated stock price reaction around the announcements of ‘stock
capitalization changes’ (bonus stock issues, stock splits and rights issues) in Australia for the
period between 1960 and 1969 using monthly data. They found 20.2% abnormal returns for
13 months up to end including the month of bonus issue announcements.

7
Only a few papers have explored the issue, stock split and stock dividend when examining
the announcement effect. One of the few studies making this distinction is that of Rankine
and Stice (1997), who document that, stock dividends are generally associated with a higher
announcement effect than stock split. Their explanation for these findings is that stock
dividend are a stronger signal since “ by voluntary reducing the existing pool of distributable
funds, managers of undervalued firms can signal their confidence that such a reduction will
not negatively impact the firm’s ability to make future cash distributions”, which is the
rationale behind the retained earnings hypothesis. A more recent paper of Bechmann and
Raaballe (2005) examines the differences between stock split and stock dividend in the
Denmark stock market. Bechmann and Raaballe found that the announcement effect of stock
dividend as well as stock split is closely related to changes in a firm’s payout policy, but that
the relationship differs for the two types of events – support of the retained earnings / cash
dividends hypothesis for stock dividends and the cosmetic / cash dividend hypothesis for
stock split.

4. LITERATURE REVIEW

Several studies have considered the relation of the announcement effect to stock split and
stock dividends since Fama et al. (1969) found that the two types of events are associated
with a positive stock market effect. Broadly speaking, the literature in this area can be split
along three categories: the first category deals with the potential theoretical reasons that can
explain why managers may resort to stock splits and stock dividends. The second category
consists of papers that are predominantly of empirical nature and those who investigate and
document the reaction of the stock market around the announcement (and / or the ex-date) of
the decision to split/ bonus; we term this literature as ‘event’ analysis literature since it
follows a classical event analysis methodology. The third category of papers deals with the
long term implications of stock split / stock dividend and compare variables such as rates of
returns, variance, short interest, market betas, traded volume, bid-ask spread, liquidity around
pre and post announcement periods. Our paper falls in the second category. We focus on
reviewing the literature from the point of different explanations for the announcement of
stock split and stock dividends.

8
The optimal trading range hypothesis suggests that a stock split and a stock dividend change
the stock price to a more optimal trading range which in turn increases the demand for stock,
leading to a positive stock price effect (Lakonishok and Lev, 1987). Forjan and McCorry
(1995) claim evidence for a increase in market liquidity. Several studies (including Dolley,
1933, Barker, 1956, and Lamoureux and Poon, 1987) report that the number of shareholders
increases after a split. Myers and Barkay (1948); Barker (1956); Johnson (1966) and
McNichols and Dravid (1990) provide further support for a optimal trading range.
The market maker hypothesis argue that a stock split and a stock dividend can increase the
relative bid-ask spread, whereby the market maker will be more active in promoting the
stock, leading to a positive stock market effects (Angel, 1997; and Schultz, 2000). Conroy et
al. (1990) document a decrease in bid-ask spread and an increase in true variance in the post
split period that is conformed by Dubosfsky (1991) and more recently by French and Foster
(2002).

According to Ross (1977) and Leyland and Pyle (1977), managers use financial decisions
such as stock split and stock dividends to convey favourable private information about the
current value of the firm. Klein and Peterson (1989), Grinblatt, Masulis, Titman (1984),
Brennan and Copeland (1988), Asquith et al (1989), Lakonishok amd Lev (1987) provide
further support for this. Ikenberry et al (1996) combine the trading range hypothesis with the
signaling hypothesis.

However, all studies in this area do not distinguish between stock split and stock dividend.
In a study, which does consider the difference between the events, Wulff (2002) looked at the
Greman stock market, and similar to Rankine and Stice (1997), found that the announcement
effect is more positive for stock dividend than for stock split. Grinblatt et al (1984) posit that
stock dividend signal greater future earnings expectations than stock split. They interpreted
it as evidence in favor of the ‘retained earnings hypothesis’: the dissimilar accounting
treatment of these two types of stock distributions affects retained earnings in different ways.
Eisemann and Moses (1978) surveyed manager’s views concerning stock dividend whereas
Baker and Gallagher (1980) surveyed manager’s views regarding stock split. The studies

9
reported that firms issue stock split to keep stock price in an optimal trading range whereas
that for stock dividend is related to a desire to conserve cash, to express confidence in the
firm and to increase the number of share holders.

A few studies have been carried out in recent years to test the announcement effect of bonus
issue in the Indian stock market. Ramachandran (1985) found mixed evidence for semi-
strong form efficiency of Indian stock market. Obaidullah (1992) and Rao (1994) found
positive stock market reaction to equity bonus announcements. Rao and Geetha (1996)
documented that one could not make excess money in the stock market by studying that
patterns of abnormal returns of announcements made earlier. Srinivasan (2002) found
extremely large positive abnormal returns on ex-bonus and ex-rights dates for equity stocks.
Mishra (2005) found significant positive abnormal returns for a five-day period prior to
bonus announcement. Similar study by Budhraja et al (2004) suggests that abnormal returns
in stock prices around the bonus announcement date over a three day trading period starting
one day before the announcement date is significant at 95% confidence limit. It also says
that much of the information in the bonus announcement gets impounded into stocks by the
time of announcement.

5. DATA AND METHODOLOGY

Data and Sample

The sample consisted of 90 stock splits and 82 bonus issues announced by companies listed
on the BSE 500 index during the period April 1, 2001 to 31st March 2007. The information
on stock splits and bonus issues is based mainly on press reports and leading newspapers
such as Economic Times and Business Standard. Additional information is taken from NSE
and BSE Website. The daily security and BSE 500 index closing prices are taken from BSE
Website. The event date is defined as the announcement date of the board meeting
considering stock splits or bonus issues. This approach assumes that the information was first
known to the market on the event date itself. In order to identify the announcement date as
exactly as possible, the event dates are cross checked with the Prowess Data base maintained
by CMIE.

10
Announcement Effects
The study used the event study methodology to examine the market reaction to bonus issues
and stock splits on share prices. For this purpose, the study used daily adjusted prices for
sample stocks for 40 days before and 40 days after the event date. In order to carry out an
event study, we determine the event window as t = -40 to t = +40 relative to the event day t =
0 (date of announcement of bonus/stock split). The return on the market portfolio is proxied
by the BSE 500. The event window is taken as t = -40 to t = -41 relative to the event day t =
0. Our aim is to find whether the events have any signaling impact on the share prices. In the
signaling hypothesis, it has been stated that managers often resort to bonus issues/stock splits
in order to signal positive information about the firm. This results in a price increase after the
announcement of the event. The procedure for using event study is discussed below.

Estimation Procedure

The purpose of our study is to determine whether there is any abnormal return around the
event dates and how fast the new information is absorbed in the security prices. For the
purpose of the study, we constructed a null hypothesis (H0) as follows:

There is no significant Average Abnormal Return (AAR) around the event dates, i.e. 1/n∑AR
=0
where n is the number of sample companies.
We focus on the abnormal returns of our sample in the period over 40 days prior and 40 days
after the event date. Brown and Warner (1980) reported that ‘a simple methodology based on
the market model is well-specified and relatively powerful under a wide variety of
conditions.’ Following Brown and Warner, we employ the market model to compute the
abnormal returns that are derived from the following equation:

Rj,t = άj + βjRmt + έjt

Where, Rj,t = the daily return security j at day t

11
Rmt = the daily return on Indian stock market at day t
άj , βj = OLS intercept and slope coefficient estimators, respectively
έjt = the error term for security j at day t

We use the BSE 500 price index as a proxy for computing market return. To compute daily
market return, we use logarithm of daily return to avoid serial correlation.
Rmt = Log (It/It-1)

The daily return for security j is:

Rjt = Log (Rt/Rt-1)
άj , βj are derived from the market model over one year prior to the event month. The
expected returns for security j at day t are defined as,

ERjt = άj + βjRmt
Where άj, βj are OLS estimators of (άj , βj).
We measure the daily abnormal return as ARjt = Rjt – ERjt. For each event date t, the cross
sectional average abnormal returns for all firms are defined as:
n
AARt = 1/n∑ έjt
J=1

t = -40 to +40
n = 82 for bonus issues &
n = 90 for stock splits

To analyse the price effects, we compute the Cumulative Average Abnormal Returns
(CAAR) for the 81 days centered in the announcement dates. The use of CAAR is a common
methodology. CAAR for event days t1 to t2 were obtained as follows:
t2
CAAR = ∑AARt
t=t1

12
6. RESULTS

In the study we considered the event window of 81 days consisting of t-40 to t+40 relative to
event day t0. Event date is date of announcement of bonus or stock split.

The aim of the study being exploring efficiency characteristics of the Indian stock market, it
is tried to explore, whether the Average Daily Abnormal Returns are indicating any pattern
or not. Further whether any sample company delivers abnormal returns on and around
announcement date is also investigated.

The results of our study concerning the daily AAR of bonus issues are presented in
Annexure I. On the announcement date, there is positive average abnormal return of 1.8%
which is very significant at 0.01% level. The results of the event study concerning the daily
AAR of stock split announcements are presented in Annexure II. Table 1 summarises the
impact of bonus issues or stock splits on share price performance. We found that 77% of
sample companies have positive mean return in respect of stock split whereas that for bonus
issues is 57%. Hence stock splits may give an investor more return than that from bonus
issues, considering entire event window. But on announcement date of bonus, 83% of sample
companies experienced positive return compared to 69% of sample companies having
positive return on stock split announcement date. Thus on the announcement date, reaction of
market participants to bonus issues found to be more positive than that to stock splits.

13
 Table 1
Impact of Event (Bonus Issues or Stock Splits) Announcement on Share Price
Performance
Particulars Bonus Issues Stock Splits
No. of companies Percentage No. of companies Percentage
Companies having 47 57% 66 73%
positive mean return
during event window
Companies having 35 43% 24 27%
negative mean return
during event window
Companies having 68 83% 62 69%
positive return on
announcement date
Companies having 14 17% 28 31%
negative return on
announcement date
Total 82 100% 90 100%

Table 2 displays the statistical significance of the abnormal returns. It is observed that more
companies are having statistically significant abnormal return in respect of stock splits
considering entire event window. It may suggest that chances are more to have abnormal
return during stock split announcement than during bonus issue announcement.

Table 2
Bonus Issues and Stock Splits: Statistical Significance of Abnormal Returns
Particulars Bonus Issues Stock Splits
No. of companies Percentage No. of Percentage
companies
Companies having significant 6 8% 9 10%
AAR at 1% level
Companies having significant 5 6% 11 12%
AAR at 5% level
Companies having significant 5 6% 5 6%
AAR at 10 % level
Not significant 66 80% 65 72%
Total 82 100% 90 100%

14
To track abnormal returns over a number of trading days, cumulative abnormal return
(CAAR) is computed through out the event period for bonus issue and stock split separately.
Table 3 presents mean CAAR across different event windows.

Table 3
CAR across the Event Windows
Days Bonus Issues Stock Splits
Mean CAAR Variance Mean CAAR Variance
t-40 to t-21 -0.00007 0.00001 .00176 0.000002

t-20 to t-1 0.00137 0.00000 .000627 0.000001

t0 to t1 0.0123 0.00006 .00767 0.00001

t-1 to t1 0.01012 0.00005 .00621 0.00001

t+2 to t+20 0.00045 0.00000 .000186 0.00001

t+20 to t+40 -0.0007 0.000006 .000665 0.00001

t-40 to t+40 0.000567 0.00001 .000988 0.00001

Fig. 1 & 2 gives line graph showing CAAR over the event window. For both events we find
the typical price movement. On the announcement date, there are big upward jumps and
after the run up is over, there is no further drift in stock price. The pattern of CAAR of bonus
issue is typical and there is significant AR around announcement date. It is found that on an
average, sample stocks having bonus announcements, start showing positive AR around 17 to
16th days before the announcement date. On the other hand, CAAR of stock splits for sample
stocks are positive during entire event window. It appears that companies experiencing bull
run are resorting to stock splits. AARs far before the announcement dates are not generally
significant. Post announcement AARs for bonus issues are mixed and not significant except
first and fourth day. Except the first post announcement date, no other post announcement
dates are having significant AAR for stock splits.

15
 Fig 1
CAAR for Bonus Issues

Fig 2
CAAR for Stock Splits
CAR Day Wise

0.09000
0.08000
0.07000
0.06000
Return

0.05000
Series1
0.04000
0.03000
0.02000
0.01000
0.00000
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81
Days

16
5. CONCLUSION

This paper examines the announcement effects of stock splits and bonus issues on the Indian
stock market during the period April 2000 to March 2007. An event study is conducted
using a 81-day event window. The `study finds a positive AAR of 1.8% in respect of bonus
issues which is relatively high and very significant at 0.01% level. In respect of stock split,
the AAR is of 0.8% which is also very positive and highly significant at 0.01% level. Our
findings about stock splits differ from that of Gupta et al. (2007) who found that there was no
announcement effect associated with stock split in India. On an overall basis, the pattern of
CAAR is found to be in accordance with expectations thereby lending support to the
hypothesis that Indian stock market is efficient in semi strong form. Also our study supports
the signaling hypothesis consistent with the findings in the developed stock market.

Bonus issues and stock splits are considered to be cosmetic events and except accounting
treatment, their impacts are likely to be the same. Interestingly, we found that bonus issues
result in sharp spike on the announcement date. Stock splits announcements are resulting in
positive returns during entire event window although effect on announcement date is not that
sharp. It may be due to the fact that stock splits are more common for momentum stocks
whereas bonus issues are made for all type of stocks. This phenomenon may need further
exploration.

17
 Annexure I
Share Price Reaction around Bonus Issue (81 days window)
Day AAR CAAR t-value Sig 2 tail
-40 -0.00047 -0.00047 -0.418 0.677
-39 0.000382 -8.5E-05 0.296 0.768
-38 0.001749 0.001665 1.535 0.129
-37 -0.00079 0.000876 -0.701 0.486
-36 -0.0092 -0.00833 -0.52 0.605
-35 0.000535 -0.00779 0.44 0.661
-34 0.001035 -0.00676 0.768 0.445
-33 -0.00056 -0.00731 -0.316 0.753
-32 0.001123 -0.00619 0.683 0.496
-31 -0.00016 -0.00635 -0.111 0.912
-30 0.001534 -0.00481 1.256 0.213
-29 0.00041 -0.00441 0.356 0.722
-28 0.000351 -0.00405 0.289 0.773
-27 -0.00161 -0.00566 -1.331 0.187
-26 0.001222 -0.00444 1.007 0.317
-25 0.001216 -0.00323 0.838 0.404
-24 -6.4E-05 -0.00329 -0.05 0.96
-23 0.000192 -0.0031 0.157 0.875
-22 -0.00067 -0.00377 -0.473 0.638
-21 0.002463 -0.00131 1.866 0.066
-20 -0.00067 -0.00198 -0.644 0.521
-19 0.000582 -0.0014 -0.1331 0.187
-18 -0.00081 -0.00221 -0.734 0.465
-17 0.001108 -0.00111 0.873 0.385
-16 0.002186 0.001081 2.243 0.028
-15 -0.00048 0.000597 -0.404 0.687
-14 0.00298 0.003577 1.927 0.058
-13 -3.7E-05 0.00354 -0.03 0.976
-12 0.002033 0.005573 1.366 0.176
-11 0.001082 0.006655 1.064 0.291
-10 0.001666 0.008321 0.785 0.435
-9 0.000547 0.008869 0.301 0.764
-8 0.002409 0.011278 1.625 0.108
-7 0.000949 0.012227 0.67 0.505
-6 0.000116 0.012343 0.073 0.942
-5 0.001949 0.014292 1.413 0.161
-4 0.003297 0.017589 1.769 0.081
-3 0.000653 0.018241 0.441 0.66
-2 0.002691 0.020933 1.779 0.079
-1 0.005202 0.026135 2.964 0.004
0 0.017969 0.044104 6.498 0
1 0.007201 0.051305 3.203 0.002
2 0.000553 0.051858 0.331 0.741

18
3 -0.00029 0.051572 -0.151 0.88
4 0.003089 0.054661 1.811 0.014
5 0.003433 0.058094 2.035 0.045
6 3.4E-05 0.058128 0.022 0.982
7 0.001648 0.059776 1.055 0.294
8 -0.00111 0.058669 -0.983 0.329
9 -3.2E-05 0.058637 -0.028 0.977
10 -0.00132 0.057314 -1.073 0.287
11 -0.00173 0.055585 -1.334 0.186
12 0.000445 0.056031 0.406 0.686
13 0.000188 0.056219 0.227 0.821
14 -0.00175 0.054471 -1.585 0.117
15 0.000856 0.055327 0.792 0.431
16 1.42E-05 0.055342 0.01 0.992
17 -0.00022 0.055126 -0.162 0.872
18 0.0019 0.057026 1.696 0.094
19 0.001611 0.058636 1.311 0.194
20 0.001237 0.059874 0.986 0.327
21 0.000621 0.060495 0.46 0.647
22 0.001435 0.061929 1.324 0.19
23 0.00033 0.06226 0.262 0.794
24 0.000905 0.063165 0.819 0.415
25 -0.00191 0.061252 -1.215 0.228
26 0.003153 0.064405 1.823 0.012
27 -0.0042 0.060205 -1.466 0.146
28 0.001362 0.061568 0.275 0.275
29 -0.00368 0.057884 0.002 0.002
30 -0.00085 0.057031 0.532 0.532
31 -8.7E-05 0.056944 0.941 0.941
32 -0.00231 0.054631 -1.961 0.053
33 -0.00302 0.051616 -1.562 0.122
34 -0.00072 0.050898 -0.434 0.666
35 0.000145 0.051043 0.084 0.933
36 -0.00279 0.048253 -0.785 0.435
37 0.00284 0.051093 1.484 0.142
38 -0.00641 0.044688 -1.088 0.28
39 0.000216 0.044904 0.177 0.86
40 0.00105 0.045954 0.448 0.656

19
 Annexure II
Share Price Reaction Around Stock Split (81 days window)
Day AAR CAAR t-value Sig 2 tail
-40 0.001327 0.001346 0.834 0.407
-39 0.001289 0.002636 0.989 0.325
-38 0.003762 0.006398 2.608 0.011
-37 0.002091 0.008489 1.315 0.192
-36 0.002563 0.011052 1.617 0.11
-35 0.003987 0.015039 2.617 0.01
-34 0.000635 0.015674 0.402 0.688
-33 -0.00164 0.014032 -1.102 0.273
-32 0.000595 0.014628 0.568 0.571
-31 0.001077 0.015704 0.837 0.405
-30 0.00534 0.021044 3.532 0.001
-29 0.001401 0.022445 1.097 0.275
-28 0.002535 0.02498 1.612 0.11
-27 0.003052 0.028032 2.059 0.042
-26 0.001154 0.029186 1.825 0.071
-25 0.001955 0.03114 0.86 0.392
-24 0.00087 0.032011 0.627 0.532
-23 0.001893 0.033903 1.44 0.153
-22 -0.00147 0.032435 -1.164 0.247
-21 0.002859 0.035294 2.113 0.037
-20 0.002818 0.038112 1.85 0.068
-19 0.001471 0.039583 1.011 0.315
-18 0.000456 0.040039 0.331 0.741
-17 0.00138 0.041419 0.852 0.397
-16 -0.00066 0.040762 -0.659 0.512
-15 -0.00153 0.039235 -1.37 0.174
-14 0.00185 0.041086 1.351 0.18
-13 0.001938 0.043023 1.52 0.132
-12 -0.00045 0.04257 -0.439 0.662
-11 -0.00013 0.042444 -0.105 0.917
-10 -0.00053 0.041911 -0.468 0.641
-9 -0.00059 0.04132 -0.409 0.684
-8 0.000999 0.042319 0.768 0.444
-7 -0.00031 0.042012 -0.281 0.778
-6 -0.00027 0.041743 -0.279 0.781
-5 0.002064 0.043806 1.684 0.096
-4 0.001071 0.044877 0.839 0.404
-3 0.000139 0.045017 0.141 0.888
-2 -0.00048 0.04454 -0.363 0.718
-1 0.003294 0.047834 2.676 0.009
0 0.008677 0.056512 4.824 0
1 0.006664 0.063176 3.54 0.001
2 0.002109 0.065285 1.499 0.137

20
3 -0.00183 0.063459 -1.353 0.179
4 0.0005 0.063959 0.405 0.686
5 0.001139 0.065098 0.76 0.449
6 -0.00073 0.064371 -0.591 0.556
7 -0.00132 0.063051 -0.955 0.342
8 1.46E-05 0.063065 0.109 0.914
9 0.00073 0.063795 0.222 0.825
10 0.000116 0.063912 0.01 0.992
11 -0.00378 0.060134 -1.19 0.237
12 0.000249 0.060383 0.616 0.54
13 -0.00211 0.058275 -1.699 0.093
14 -0.00017 0.058101 -0.143 0.887
15 0.000361 0.058463 0.345 0.731
16 0.000734 0.059196 0.672 0.503
17 0.001833 0.061029 1.17 0.245
18 0.002027 0.063056 1.45 0.151
19 0.002179 0.065235 2.111 0.038
20 0.001478 0.066713 1.087 0.28
21 0.00036 0.067073 0.319 0.75
22 0.000197 0.067269 0.221 0.826
23 0.000551 0.06782 0.518 0.606
24 -5.9E-05 0.067761 -0.042 0.966
25 0.001946 0.069707 1.484 0.141
26 0.000394 0.070101 0.342 0.733
27 -0.00072 0.069381 -0.598 0.551
28 0.002676 0.072057 2.537 0.013
29 0.002142 0.074199 1.927 0.057
30 0.00369 0.077889 2.815 0.006
31 -0.00087 0.077019 -0.733 0.466
32 0.001263 0.078282 1.351 0.18
33 -0.00043 0.077848 -0.36 0.72
34 0.000481 0.078329 0.449 0.654
35 0.000573 0.078902 0.524 0.602
36 -0.00066 0.078247 -0.579 0.564
37 -0.00064 0.077604 -0.549 0.585
38 0.000659 0.078263 0.624 0.534
39 0.001139 0.079402 0.728 0.469
40 0.00062 0.080022 0.585 0.56

21
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