Stock splits and their effect on share prices : study of firms listed at the Nairobi stock exchange
Munyao, John Mwendwa
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The relationship between stock splits and stock prices has been the subject of continuing interest to economists and practitioners. The reaction occurring after the announcement, however, has not been fully understood and explained. Naidu (2008), states that theoretically, a stock split is merely a numerical change, which leaves investors no better or worse off than they were before the split. This implies that there must be some benefit, either real or perceived, that results from a firm splitting its stock. The purpose of this research was to determine whether a stock split announcement had an impact on the related stock price with specific reference to companies listed at the Nairobi Stock Exchange. The specific objectives were to determine motivation behind stock splits within the Kenyan market; and to determine if stock splits have any effect on the share price. Primary and secondary data was used to achieve the research objectives. Primary data was obtained by conducting interviews with key decision makers in companies that had split their stocks and were listed at the Nairobi stock exchange. Secondary data was collected from the database of the Nairobi stock exchange. Analysis was done using Microsoft Excel and SPSS computer programs and output presented using appropriate visual techniques, i.e., tables, graphs and charts. Studies by various scholars like Lyroudi et al (2006) are consistent with findings of this research especially on the trading range hypothesis. Baker & Powell (1993) agree on the reason why stock splits occur. They agree that most splits occur so that shares prices are brought to an optimal range. The study established that most companies undertook stock splits so as to bring the trading range of the share price to an optimum point. This was undertaken so that the majority of investors, both individual and institutional, could have access to the shares of the company. The study further established that other factors such as the split ratio employed, for instance the fact that most companies at the Nairobi stock exchange employed a 10 for 1 ratio could have an effect on the post split share price.