Share Price Responses to the Announcement of Bonus Share

Abstract

Companies distribute profit to the shareholders in the form of dividend. Many factors influence the dividend decision of a company. The payout ratio depends on the profitability and the dividend policy of the concerned company. Companies also distribute the dividend in the form of bonus share to the existing shareholders. This study examines the market reactions to the announcement bonus shares by IT companies. Event study methodology is employed to measure the impact of bonus share announcement on the share price. Abnormal returns and cumulative abnormal returns were computed using the market model and tested to assess the market reaction.  The examination of share price to the announcement reveals insignificant response from the market. This result indicates that bonus issue is not new information to the market and no investor in the market book abnormal returns using the bonus issue announcement. Further Indian market is efficient in processing the new information and the market quickly absorbs the new information and reflects it in the share price.