Stock Market Reaction and Liquidity Changes Around Bonus Issue Announcement: Evidence from India

12 Pages Posted: 13 Feb 2007

See all articles by Madhuri Malhotra

Madhuri Malhotra

Indian Institute of Technology (IIT), Madras

M. Thenmozhi

Indian Institute of Technology Madras

G. ArunKumar

Indian Institute of Technology (IIT), Madras

Date Written: December 19, 2007

Abstract

This study examines share price reaction to the announcement of Bonus Issue for a sample of Indian Companies. Standard event study methodology has been used for the purpose of studying the Bonus issue announcement reaction. Bonus issue announcement yields negative abnormal returns around the announcement date. There is a negative reaction after the bonus issue announcement conveying that the market underreacts after the announcement. It is also observed that there is no information leakage prior to the announcement. Reduction in the liquidity ratio after the announcement is evidenced, though insignificant. All the three liquidity measures seem to be inconsistent with the enhanced trading liquidity expectation. Cross sectional regression shows that the number of shares issued, convey a positive signal to the investors. Further it has been evidenced that the size of the firm issuing bonus shares does not affect the abnormal returns of the company. The study supports Signaling Hypothesis and Cash Substitution Hypothesis.

Keywords: Event study, Stock dividend, Liquidity, Stock market, Cross Sectional Regression

JEL Classification: G14, G32

Suggested Citation

Malhotra, Madhuri and Thenmozhi, M. and ArunKumar, G., Stock Market Reaction and Liquidity Changes Around Bonus Issue Announcement: Evidence from India (December 19, 2007). 10th Capital Markets Conference, Indian Institute of Capital Markets Paper. Available at SSRN: https://ssrn.com/abstract=962830

Madhuri Malhotra (Contact Author)

Indian Institute of Technology (IIT), Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu 600036
India

M. Thenmozhi

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

G. ArunKumar

Indian Institute of Technology (IIT), Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu 600036
India

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