Market Reaction to Stock Split
MARKET REACTION AROUND BONUS ISSUES AND STOCK SPLIT IN PHARMACEUTICAL INDUSTRY
Submitted By:
NIMISHA.M.BABU
1020251
Under the Guidance of:
PROF. ANIRBAN GHATAK
CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT
BANGALORE
CHAPTER- 1
INTRODUCTION
1.1BACKGROUND OF THE STUDY
BONUS ISSUE
Bonus issues are simply distribution of additional stocks to the existing shareholders. It is a “free” issue of shares, without a subscription price, made to existing shareholders in proportion to their current investment. A firm can distribute bonus shares by using retained earnings or accumulated capital reserves. The relationship between Bonus issues and share prices has been the subject of much empirical discussion within the finance literature. Empirical research (particularly in US) has shown that the market generally reacts positively to the announcement of a bonus issue. The hypothesis that has received strongest support in explaining the positive market reaction to bonus issue announcements is the signalling hypothesis.
A company can distribute bonus stocks by using retained earnings or accumulated capital reserves. If a company distributes a bonus issue by using retained earnings, it makes a book entry to allocate retained earnings into paid- capital in the stockholders‘ equity section of the company balance sheet. Alternatively a company if decides to distribute 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. Thus they result in each stockholder 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 stockholder‘ s proportional ownership of stocks, capital structure and financial position of company. Since bonus issues do not enhance earning power, change the
Submitted By:
NIMISHA.M.BABU
1020251
Under the Guidance of:
PROF. ANIRBAN GHATAK
CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT
BANGALORE
CHAPTER- 1
INTRODUCTION
1.1BACKGROUND OF THE STUDY
BONUS ISSUE
Bonus issues are simply distribution of additional stocks to the existing shareholders. It is a “free” issue of shares, without a subscription price, made to existing shareholders in proportion to their current investment. A firm can distribute bonus shares by using retained earnings or accumulated capital reserves. The relationship between Bonus issues and share prices has been the subject of much empirical discussion within the finance literature. Empirical research (particularly in US) has shown that the market generally reacts positively to the announcement of a bonus issue. The hypothesis that has received strongest support in explaining the positive market reaction to bonus issue announcements is the signalling hypothesis.
A company can distribute bonus stocks by using retained earnings or accumulated capital reserves. If a company distributes a bonus issue by using retained earnings, it makes a book entry to allocate retained earnings into paid- capital in the stockholders‘ equity section of the company balance sheet. Alternatively a company if decides to distribute 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. Thus they result in each stockholder 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 stockholder‘ s proportional ownership of stocks, capital structure and financial position of company. Since bonus issues do not enhance earning power, change the
Bibliography: 1. Dr. A.K. Mishra, Associate Professor, Indian Institute of Management, (2005) “An empirical analysis of market reaction around the bonus issues in India” 2 3. Jijo Lukose P. J.( December 2002); “Does bonus issue signal superior profitability? A study of the BSE Listed Firms” 4 5. Rao, K Chandra Sekhara and Geetha, T (1996), Indian Capital Market: Informational Signaling and Efficiency, New Delhi:A.P.H. Publishing Corporation.