Abstract
Corporate action is usually believed to offer some good news to the investors, particularly in case of amalgamation and mergers. In many cases, corporate actions do not involve any potential future positive benefits to the company as is the case with bonus issue and stock splits. Such types of actions of the companies could be called as fictitious corporate actions. It has been noticed by many empirical studies that the market react positively to the announcement of bonus shares and stock splits.
This study analyses the reasons for the issue of bonus shares and stock splits on a sample of 165 companies which have issued bonus shares and 134 companies which have gone for stock splits during January 2000 to September 2006. An effort is also made to find the distinguishing conditions under which a company has to decide whether to issue bonus shares or to go for stock splits. Five variables have been considered for the study: rate of growth of sales and profit, beta and share price increase, and promoter stake. Effort has been made to explore whether there is any significant difference in these variables as applicable to stock split and bonus shares.
The study reveals that top management of the companies decide to issue bonus shares when the investors undervalue the company while they go for stock split when the investors overvalue the company for a long time and promoters have to step in to correct these anomalies. This merely goes on to prove that capital markets are not inherently efficient even in the long run and promoters have to intervene to manage the prices of their stocks through corporate actions. This puts a question mark on the Market Efficiency Hypothesis and an effort has been made to test the ability of NSE to depict semi-strong and strong form of Market Efficiency Hypothesis.
As far as policy implications are concerned, the author suggests that:
Companies may resort to bonus shares issue if the rate of growth of share price lag behind the market index and the rate of growth of sales and profit is higher than the companies included in the index. In contrast, they may resort to stock split if the rate of growth of share price is higher than that of the index while the growth in sales and profit is less than the companies included in the index. One should also be cautious while applying this rationale. There are significant number of companies (negative companies) which may resort to fictitious corporate actions even if their rate of growth of sales or profit or both are negative in order to mislead the investors by resorting to false signaling.