Estimationwindow: These are specific days before the event occurring(Rudra, 2009). It is a clean period of time when dividends have not beenannounced and any observable change in stock prices is free of any effects thatcan be attributed to the event such as dividend announcements.Eventwindow: Refers to the days around which effects of anevent is experienced (Rudra, 2009). It is the specified period of time duringwhich the effects of event such as dividend announcements are expected tooccur. Actualreturns: These are the observed and calculated from theactual share prices in a day. These are used in finding abnormal returns whichis the diffence between expected and actual returns before and after the event(Shehub et al., 2012).
Normalreturns: These are the estimated “normal” change in stockprices (i.e. the returns). Stock prices do fluctuate from the expectedestimates when compared with the actual prices. The returns from estimates arethe normal returns which will be compared with actual returns (Fama, 1998). Stockreturns: This refers to the daily changes or magnitude ofmovement of prices from the start of the day to the price closing in themarket. It is expressed as a percentage of the previous price (Rudra, 2009).For example, when a security trades in the morning of a particular day at Ksh30while the price in the evening is Ksh33 then the return for the day is tenpercent (33-30/30=0.
10).Efficiency:Madura (2007) defines efficiency to be the capacity of a security reflectingand accommodating available information in the market prices. A market is saidto be highly efficient if it can incorporate new information in the prices of asecurity very fast. A market is less efficient if it takes lengthy time toincorporate new information in the share prices.
The price movements ofsecurities are always random in a market where participants recognize newinformation availed into the market from time to time.Event study:This refers to a research methodology developed which is used in the fields offinance and economics to evaluate how events affect security prices and to whatextent (Aristeidis & Dimitris, 2004). These studies are characterized bymeasuring of abnormal returns and cumulative abnormal returns before and afterthe event occurrence. The event can be dividend announcement, bonus, earnings,death of senior manager among many others.1.
9 OperationalDefinition of Terms The study assumes that all investors are rationaland are aiming to maximize utility. Thismeans investors want to maximize their wealth with minimum risk attached.Another assumption is that all investors can freely and readily access informationand those participants have homogeneous expectations. Players in the market areassumed to be price takers which mean prices are not affected by trading volumeof a single person or institution. The study also assumes that bonus issues,earnings, and dividend announcements provide information to investors, which isuseful in evaluating securities value.
The last assumption critical inevaluating efficiency is that we can be able to get expected returns throughregression which will be compared with actual returns. This will lead us indetermining the abnormal returns and cumulative abnormal returns.1.8 Assumptions Other information announcements in the vicinity ofevents announcements being considered might have a potential to contaminate theresults. Contemporaneous announcements will be set aside from the data set. Thedata set will be got from NSE reports and secondary data, which includes otherevent announcements apart from the one being investigated at the moment. Giventhat NSE is not very big, it might not be likely to remove all contemporaneousissues without eliminating substantial number of data points.One of the major limitations is theselection of announcement dates to be used in the study as there are differentmodes of announcing an event in public.
This can be through media, annual generalmeeting or any other forum. This owes to the fact that companies have completediscretion on bonus issues and the payment of dividends. Management decideswhen, where and how to make such announcements; which may be made through pressor during annual general meetings. The information may not get to the investorsat the same time and this can impair the results of the study. To overcome thisproblem, dates when bonus issues, dividends, earnings were officially announcedat NSE will be used. Companies listed at NSE are always demanded to give eventannouncements on notice to dealing members file. This has to be done within aspecified period after AGM has approved the payment. The law is intended toavert privileged dealing on such information.
These dates are considered toprovide a standard for determining when the news of dividend announcementsbecomes available to the general public for the first time. The dates forearnings announcement to be adopted are the ones on NSE handbook for the finalaccounts.1.7Limitations The study is supposed to give an insight onefficiency of NSE in Kenya in semi strong form. The semi strong tests are usedto assess incorporation of publicly available information in the share pricesbased on previous studies. The research will be covering bonus issues, sharesplits, rights issues, dividend announcements, earnings announcements of listedcompanies from year 2012 to 2016. This period is targeted as it the findingswill bring out recent trends in the market helping stakeholders get currentinformation in making decisions. The event window period will be 30 days beforeand after the announcement.
It will involve secondary data obtained from NSEand recorded on an observation form. The target population is 57 listedcompanies at Nairobi Securities Exchange operating from 2012 to 2016.1.
6 ScopeThis research will help future researchers to have abackground and work further on therecommendations to build further on literature about Nairobi securitiesexchange and the level of efficiency.Nairobi Securities Exchange and Capital MarketAuthority which are regulatory agencies will be interested on information sincethey regulate the content and timing of information reported in capital marketsand the movement of share prices in general.The information will act as a guideline to local andforeign investors as the prices affect their investments. Investors would liketo know the extent to which information available is reflected in the stockprices. They would also like to know the extent to which expected prices differfrom actual prices and what brings the variance. During project evaluation, managers require adiscount factor to carry out feasibility tests on whether to undertake aproject or not. The capital budgeting techniques are then used in determiningwhether a project is viable or not.
If the market is not efficient in regard tobonus, earnings, dividends, it means the base for evaluation of projects isdistorted and will give wrong results. This will lead to wrong projects beingundertaken and right projects being left out.The study aims to investigate semistrong efficiency at Nairobi Securities Exchange.
This will assist in makingdecisions by the stakeholders interested in the market. Managers are split onwhen to make an announcement with some suggesting there exists an optimalperiod to announce an event. This will help them in formulation of futuredividend policies as they have the discretion on amount and timing of dividendannouncements. This can only happen when the comprehensive study and analysisof the factors in the study have been fully established.1.
5 Significanceof the StudyH0: The regulatory framework does notsignificantly influence the relationship between dependent and independentvariables at NSE.H0: The share prices are not significantlyinfluenced by share splits announcements at NSE.H0: The share prices are notsignificantly influenced by rights issues announcements at NSE.H0: The share prices are notsignificantly influenced by earnings announcements at NSE.
H0: The share prices are not significantlyinfluenced by dividend announcements at NSE.H0: The share prices are notsignificantly influenced by bonus issue announcements at NSE.The hypotheses are stipulated as:1.4 ResearchHypotheses f) To assess how regulatory frameworkmediates between dependent and independent variables at NSE.e) To evaluate the effect of share splitsannouncement on share prices at NSE.
d) To examine the effect of rights issuesannouncement on share prices at NSE.c) To determine the effect of earnings announcementon share prices at NSE.b) To analyze the effect of dividendannouncements on the share prices at NSE.a) To assess the impact of bonus issuesannouncement on share prices at NSE.
Thestudy seeks to achieve the following objectives:1.3.1 SpecificObjectivespoliticalchanges, top management changes among others. The study will investigate thefive factors because these factors affects big population of companies listedat NSE for the expanded period of five years unlike the others which are oneoff events.