EMPIRICAL ANALYSIS OF THE SEMI-STRONG FORM MARKET EFFICIENCY OF THE NIGERIAN STOCK EXCHANGE

ABSTRACT
An efficient market hypothesis asserts that all stocks are perfectly priced according to their inherent investment properties, the knowledge of which all market participants possess equally. In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Among these market events, bonus issues from twenty-five companies decomposed into different sizes of small and high bonus, were selected after adjusting for daily stock and market returns for a period of one year to empirically test the semi-strong form efficient market hypothesis of the Nigerian Stock Exchange. Our study used the Event Study Methodology. The abnormal returns were calculated using the Market Model and T-test were conducted to test the significance. Results showed that bonus issues have signaling impact on share prices on announcement date. The result supports the signaling hypothesis, which states that managers often resort to bonus issues in order to signal positive information about the firm. As a result, we reject the null hypothesis and accept the alternative hypothesis. Despite the positive signaling, shareholders lost more value in the ex-bonus period than the value gained on event date. The different sizes of bonus issues do not matter to shareholders rather any increase on their shareholdings suffices. The cumulative abnormal returns (CARs) are statistically not significant. On the whole, the study found evidence that the Nigerian Stock Exchange is semi-strong inefficient. Consequently, the market should be deregulated to allow for foreign participation so as to have a more healthy competition. Also the buy-and–hold attitude of Nigerian shareholders should be discouraged.

CHAPTER ONE:  INTRODUCTION
1.1.     BACKGROUND OF THE STUDY
According to the Efficient Market Hypothesis (EMH), as prices respond to information available in the market, and because all market participants are privy to the same information, no one will have the ability to out-profit anyone else. The nature of information does not have to be limited to financial news and research alone; indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumoured, will be reflected in the stock price (Reem, 2008). In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful.

Accepting the EMH in its purest form may be difficult; however, Fama (1970) identified three classifications of efficiency which are aimed at reflecting the degree to which it can be applied to markets: weak form, semi-strong form and the strong form. The weak form version claims that all past prices of a stock are reflected in today’s stock price. Therefore, technical analysis cannot be used to predict and beat a market. The Semi-strong form efficiency version, implies that announcement of all public information are reflected in stock prices instantaneously and without bias. Neither fundamental nor technical analysis can be used to achieve superior gains. The Strong-form efficiency known as the strongest version, states that all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor an advantage. Fama (1991), however, changed the three classifications; the weak form now called ‘test for return predictability’; semi-strong form now called ‘event study’ and the strong form he called ‘test for private information’.

Generally, the investigation of semi-strong form market efficiency has been limited to the study of well developed stock markets. Over the past half century, event studies have been employed in much research and their sophistication has been greatly improved by authors such as Fama, et al (1969) and Brown and Warner (1980, 1985). Examples of events under semi-strong form consideration include; stock splits, stock issuance (bonus issue, public offerings), earnings announcements, merger or takeover announcements, regulatory change, hiring or firing of high level officers, among others. However, this study is on the public information/announcement of bonus issues. In this study; we employ event study methodology, which was first applied by Dolley in 1933 to examine this event for the stock market of a transition economy, Nigeria.

Event study analysis are typically used for two different purposes: as a test of semi-strong form market efficiency; and assuming that the market efficiency hypothesis holds, as a tool for examining the impact of some events on the wealth of firms’ shareholders. This study provides an initial empirical evaluation of semi-strong form market efficiency of the Nigerian Stock Exchange, using event study techniques.

In practice, ipso facto, there may be an increase in share price following the announcement of a bonus issue. Such increase can occur because the announcement of a bonus issue may have beneficial information content (Peterson, 1989). Shareholders are aware that, after the bonus issue, companies usually increase total dividend payout. This, in turn, indicates the confidence of management in the company’s future. Consequently, the share price may increase in response to this information and affect shareholders’ wealth. The informational link between dividends and earnings is supported empirically.

by Healy and Palepu (1988). They show that firms that initiate dividends have significant increases in earning for at least one year after the announcement. See similar work of foster and vickrey (1978).

Also, management may believe that reducing the market price per share to a reasonable level facilitates trade in the company’s shares and that this in turn may increase the demand (the so-called “trading range hypothesis”). If this were true, the market value of the company’s equities and hence shareholders’ wealth again would increase. An alternative way to reduce market price per share is a stock split, which represents a reduction in the par value. The essential difference between a bonus issue and a stock split need not be accompanied by a book entry to relocate earnings or accumulated reserves into paid up capital in the shareholders’ funds section of the company balance sheet.

According to the tax authority, shareholders must pay tax for a cash dividend but not for a stock dividend. In other words, they need not pay tax on the bonus, which makes the bonus more favourable than a cash dividend. In addition to this institutional advantage and to the retained-earnings hypothesis, there is some anecdotal evidence pertaining to Nigeria that suggests bonus issues signal that management is confident about the company’s future growth opportunities. However, this may not mean that in Nigeria, shareholders/investors welcome all bonus issues. A research and development director of one of Nigerian’s leading financial institutions affirmed that this is indeed the case, and that high bonus issues signal potential expansion of the company, whereas not so much with small-bonus issues.

1.2      STATEMENT OF PROBLEM
In developed countries, many research studies on semi-strong form efficiency have been conducted to test the efficiency of stock market with respect to information content of events. Whereas in Nigeria, very few studies have been conducted to test the efficiency of the stock market with respect to bonus issue announcement. Bonus issues continue to generate interest in the country, yet have no direct valuation implications. As such these events are sometimes described as “cosmetic” events as they simply represent a change in the number of outstanding shares. The reason for the interest is therefore to understand why managers would undertake such (potentially costly) cosmetic decisions.

Empirical research on semi-strong form market efficiency has been carried out in so many countries, such as in America, Germany, Australia, Denmark, China, India on bonus issues and results has shown that the market react positively to the announcement [McNichols and Dravid (1990), Lijleblom (1989), Dhar and Chhaochharia (2007), Ma and Barnes (2002), Obaidullah (1990)]. Numerous studies on semi-strong form of efficient market in Nigeria have dealt with information content of various types of announcements (Adeleyan (2001), Kolo (2004), Omoruyi (2007)). However, to the best of my knowledge, no contemporary study has investigated the information content of bonus issue announcement in the Nigerian context. This deficiency provided the raison d’etre and primary impetus for this study......

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Item Type: Postgraduate Material  |  Attribute: 121 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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