Abstract
This paper empirically analyzes the effect of secondary equity offer announcements on share returns at Nairobi Securities Exchange in Kenya by investigating the information content of the announcements and ascertaining whether the release of financial information in the capital market affects share returns. An event study employing the market return model determined share returns of 52 bonus issues and 28 rights issues announced between January 2006 and December 2015. The study established that secondary equity offer announcements had a significant and positive effect on share returns and that rights issues witnessed higher share returns when compared to bonus issues during the twenty-day event period. This study recommends management of Nairobi Securities Exchange listed companies to raise capital through secondary equity offers, as companies will increase their market capitalization. Investors on Nairobi Securities Exchange are encouraged to participate in secondary equity offers because they will earn positive share returns and increase their wealth. Existing shareholders should fully participate in rights issues because they will forgo positive share returns if they renounce their rights. Capital Markets Authority and Nairobi Securities Exchange should encourage more listed companies to raise capital through secondary equity offers, as this is advantageous to companies and investors.
Highlights
Introduction1.1 Share ReturnsThe investment principle as espoused by Goetzmann (2000) postulates that investor key objectives are driven by the need to receive a steady stream of income and cash flows as well as growing the size of their investment
This study investigated the effect of secondary equity offer announcements on share returns at Nairobi Securities Exchange and adopted a non-experimental research design
After announcement of secondary equity offers, investors on the Nairobi Securities Exchange were earning above normal share returns, market share prices were increasing significantly and as such, investors were increasing their wealth
Summary
1.1 Share ReturnsThe investment principle as espoused by Goetzmann (2000) postulates that investor key objectives are driven by the need to receive a steady stream of income and cash flows as well as growing the size of their investment. Return on an investment compensates investors for the opportunity cost arising from the time value of money, the reduction in the purchasing power of money and the risk that the amount of money invested will fail be recouped at the end of the investment period (Reilly & Brown, 2011). The summation of these three components, referred to as the required rate of return, is the minimum rate of return that an investor accepts from an investment as compensation for deferring present consumption. Investors in the shares of a company earn share returns through annual dividends received as a share of profitability and through capital gains that are realized when market share prices increase over time (Wilcox &Fabozzi, 2013)
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