THE EFFECT OF RIGHTS ISSUE ON FIRMS’ SHARE PERFORMANCE: A CASE OF KENYAN LISTED COMPANIES

ABSTRACT 
Rights issues give existing shareholders the option of purchasing new shares, normally issued at a discount to the prevailing market price in order to encourage participation in the capital raised over purchasing shares in the market. This study aimed to identify the effects of rights issue on the share performance of listed Kenyan-based companies on the Nairobi Securities Exchange. This study also aimed to compare the share performance of companies which have performed rights issue to the performance of those which have not. The research was to evaluate the effects of rights issue on firms’ subsequent trading prior to and after the issue. The target population of this study made up of all companies listed at the NSE as at 31st December 2012. In total there were 62 companies listed as at December 2012. This targeted all Kenyan based companies that are in the NSE 20 share index and those that had undertaken rights issue between 2007 and 2012. A data collection sheet was used to collect secondary data on market indices, daily closing share prices and traded volumes for a period of 20 days before and 20 days after each rights issue announcement. Daily market abnormal and cumulative abnormal returns were computed and a t-test at 95% confidence level done to determine the effect of rights issue announcement on share price and results interpreted. From the findings, it can therefore be concluded that rights issue announcements have no significant effect on investor’s reaction since 88.8% of the companies analysed indicated that there was no significant effect. On the objective to examine the effect of rights issue announcement on the share price performance of companies doing rights issue, 100% indicated a positive significance level thus positive stock price change during the period surrounding the announcement of a rights issue. This study is consistent with other studies done in this area that rights issue announcement affect the company’s share price performance.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Companies either in growth or expansion need more capital than they are sometimes able to generate internally. They explore options of raising that additional capital and a rights issue is such an option. If the objectives are achieved, they should lead to the improvement of a company's performance and the prices of its listed shares at the stock exchange should go up. 

A Rights Issue can be used to introduce new shareholders into the company through the purchase of renounced rights or through an underwriting of the issue where the underwriter undertakes to take up all the untaken Rights. At the end of the day, a Rights Issue gives both the shareholder and other investors an opportunity to participate in raising the capital of a company. The only problem for non-shareholders is that if the Rights Issue is very popular, then there may be no Rights to be bought at the trading. 

The most common types of long-term financing in Kenya include long-term debt, common stock, preferred stock and retained earnings. This implies companies can use own equity or borrow funds say through long-term debt (bonds). Companies use either equity or debt financing but equity is preferred more since it forms a permanent source of funding that cannot be easily redeemed. Listed corporations around the world typically raise external equity capital either from existing shareholders or from new investors. Where corporations raise capital from new investors, it’s called an initial public offer (IPO). Here, the public are invited to participate and the formula of allotting shares is clearly stated. Having determined the need to raise funds through equity, firms then seek to be listed at the Nairobi securities exchange if it’s a company in Kenya or they can be listed at other stock markets in other countries. Firms are listed or admitted into a stock market after meeting certain regulatory requirements set by the regulatory authority. 

The stock market in Kenya is known as the Nairobi Securities Exchange (NSE). It constitutes a voluntary association of stockbrokers. The NSE was formed in 1954. It has had a remarkable development to become amongst the most vibrant stock markets in Africa (Mugo, 2010). According to NSE, the market capitalization saw tremendous improvement hitting Ksh. 1.234 Trillion as a result of new shares which have come into the market and the increasing number of shares trading (www.nse.co.ke). Currently, there are 62 securities listed at the NSE. The Security Exchange has continued to play an important role in economic development, especially concerning its role in financial intermediation. Securities traded at NSE are bonds and shares that constitute the markets two broad segments. 

CMA on the other hand is a regulator of the Kenyan capital markets and is involved in issuing guidelines on laws governing the NSE, brokers, investment advisors and dealers. It also works together with the NSE to fix prices of shares that have been floating to ensure potential buyers buy them. It also strives to ensure that companies disclose to investors all relevant information before admitting them to the bourse and on a continuous basis after listing. A securities exchange shall within four months after end of a financial year make available to the authority and to the investors, a summary of information on companies listed at the securities exchange (Chebii, 2006). 

A rights issue is therefore an offer to buy additional securities in a corporation at a discount. It targets existing shareholders and are allocated based on the number of shares they hold. In most cases, a rights issue is offered by closed-end companies. These are companies that redistribute all their earnings failure to which, they face backlash from shareholders who may sell in mass and lower company value (Gowthorpe, 2005).

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Item Type: Kenyan Postgraduate Material  |  Attribute: 70 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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