Relationship between equity share and bonus share

Alvi, S. A. M. (2012)

Relationship between equity share and bonus share

The word bonus implies added share rewarded to shareholders in a firm from extra earning. It is open shares of stock offered to current shareholders in a firm, in relation to the figure of shares the shareholder by now have possession of by the occasion of the declaration of the bonus (Amuthan and Ayyappan, 2011). More clearly, bonus shares are issued by a firm in the case it proposes to disburse extra earning by issuing shares. Bonus shares are stated as soon as firm has enough earnings to announce bonus but either does not have the cash to disburse it or does not desire to part with it for executing various capital spending procedures. In consequence, bonus shares result in the capitalization of earnings of the firm. Relationship between equity share and bonus share

Bonus issues are just giving out of added stocks to the current shareholders, and it is an open issue of shares, devoid of a contribution price, made to current shareholders in ratio to their present deal. A firm might share out bonus shares by means of using saved earnings or accrued capital assets. The point of consideration is that in all probability, a firm will create a bonus issue just if it is sensibly definite that the upcoming cash flows will be bulky enough to hold up an increase in the cash bonus payments. Nonetheless, it might so come about that the upcoming cash flows are not sufficient and for this reason, the firms may be compelled to decrease the bonus rate that results in a lessening of cash earnings in comparison with the cash earning prior to the bonus issue (Amuthan and Ayyappan, 2011). Logically, this is an area of immense concern for both researchers and practitioners in the field of Indian stock market. Therefore studies require to be conducted to investigate how the equity share earnings of the firms behave subsequent to issuing the bonus share. From the research literature, it comes out that in some casess there is a strong relationship between equity share and bonus share whereas in several cases there is no such well-built relationship.

The association stuck between bonus issues and share prices has had been the topic of a great deal of empirical investigation in research literature related to the field of finance. Empirical research conducted with the case of advanced or developed stock markets such as US has demonstrated that the market normally responds optimistically to the declaration of a bonus issue. The proposition that has obtained the strongest hold up in elucidating the encouraging market response to bonus issue declarations is the hinting proposition, which puts forward that the declaration of a bonus issue communicates fresh information as regards the market in cases where managers have asymmetric information. This proposition has obtained just about unambiguous hold up with few exceptions. In accordance with the extended proposition, the announcements of bonus issues put across positive private information in relation to the future earnings to the investors, where managers have better information regarding the future earnings, for the reason that there might be asymmetric information involving managers and investors. These studies are related to the declaration time of bonus issue and its effect and direct to carry out the research that what will be the relationship between bonus shares and equity price behaviour of firms listed on the stock market. For conducting the research, the research process follows basically two courses of action. In the former case, the literature is reviewed as regards the research topic and in the later case, the data collected is analyzed using different analytical models. In this section of the paper the results of studies are critically discussed as regards the relationship between equity share and bonus share.

Old but one of the remarkable study investigating the relationship between equity share and bonus share is that of McNichols and Dravid (1990), and their study presents the facts to hold up the proposition that there is a positive relationship between the bonus share in the form of size of a stock dividend and the scale of atypical returns in the order of the declaration time. The results of their study confirm a positive relationship between bonus share and atypical return implying that the bigger the bonus share price, the better the obtained earnings. Nevertheless, a study conducted by Papaioannou et al. (2000) in the case of US investigates price response to bonus share price declarations by firms listed on the Athens Stock Exchange revealing no statistically significant atypical earnings on and around the declaration time. The results of this study might be elucidated by the detail that most stock dividend giving out or issuing bonus share has nothing to do with equity share and that issuing of bonus share is just compliance of fulfilling obligatory necessities forced upon the firms to gratify regulatory necessities and shareholder endorsement ought to be sought as regards the dimension and conditions of the distributions. Moreover, Ho et. al. (2002) have investigated in their study that whether there is any liquidity change flanked by the pre issue period and the post issue period of Seasoned Equity offerings making use of data from Taiwan market. The results of the study reveal that there is a statistically momentous boost in liquidity (in relation to quantity of shares traded divided by quantity of shares outstanding, while firms create seasoned equity offerings. In addition, the liquidity enrichment comes out to put up with no momentous relationship with the issuing range, the issuing price, and the market value of the firm that issues the bonus share. On the other hand, Balachandran et. al. (2004) have conducted a study investigating share price response of the declaration of bonus share issues in relation to the case of Australian firms for the duration of 1992 to 2000. Their study reveal that bonus issue declaration directs to a statistically significant affirmative price response, and further the study offers confirmation holding up the proposition reliable with the results obtained from the US, Sweden, Canada and New Zealand. Nevertheless, an exceptional result of this study is that the relationship between bonus share and equity share is stronger for industrial non-financial and mining firms than the firms operating in financial sector.

As far as the case of Indian stock market is concerned, the research literature presents some old and new studies examining the relationship between bonus share and equity share. In this context . the first and foremost study was conducted by Ramachandran (1985) , and this study investigates the effect of declaration of bonus issues on equity stock prices and comes out with assorted confirmation for semi well-built form competence of stock market in India. In another remarkable study Rao and Geetha (1996) investigates bonus declarations and comes to the conclusion that one may perhaps not create surplus funds in the stock market through learning that prototypes of atypical returns of declarations created previously. Moreover, Rao (1994) comes out with the evidences of encouraging stock market response to equity bonus declaration, estimating cumulative atypical return of 6.31 percent just about the three days of bonus declaration. Besides Mohanty (1999) comes out with the results that the majority of the firms either maintaining the matching bonus rate after the bonus imbursement or reducing it less than proportionately, subsequent to taking into account bonus imbursement and in that way boosts the cash flows to the shareholders. Furthermore, Mishra (2003) reveal a positive cumulative atypical return just about the bonus issue declaration. More importantly, Obaidullah and Srinivasan (2002) reveal tremendously big positive atypical profits on ex-bonus and ex-rights time for equity stocks. Comparable study by Budhraja et al. (2004) taking the data of BSE comes out with the results that atypical returns in stock prices just about the bonus declaration time over a three day trading phase opening one day prior to the declaration time is significant at 95 percent buoyancy maximum value. The results too state that a great deal of the information as regards the bonus declaration gets confiscates into stocks by the time of declaration. Share price or value volatility in Indian firms or organizations appear to be controlled more by rather internal factors than external factors. Specifically there comes out to be no twist of fate stuck between unpredictability of portfolio capital flows in and out of the stock market and the unpredictability budges in share price valuation of Indian firms. The results of this study as well state that share value variation of Indian firms has not heaped on following liberalization of financial sector.

Despite the bulk of studies obtainable the research literature in relations to the relationship between bonus share and equity share , it can be easily found that not much endeavor has been made to investigate the liquidity change just about bonus issue declaration and effect on equity price. This is for the reason that on the one hand, studies are less linked to emerging stock markets such as India and the studies are not fresh or up-to-the minute. Also that the varied evidences presented by the studies make the occurrence confusing rather than clearing. For the case of emerging markets like India the obtainable literature do not make available any apparent substantiation of the effect. Despite the fact that the majority of the studies have investigated the variations in atypical returns and collective atypical returns, and even a few of these studies that have been discussed above pulls out the literature to discover whether the volume of the bonus issue, the market value of firm and the pre cumulative atypical returns add to the atypical returns pragmatic around bonus issue declaration. The issuing of bonus shares being a well-liked and recurrently utilized apparatus for performance of the firms; it is significant to know the effect of such issues on the stock market both in relation to alteration in earnings and alteration in liquidity in an emerging stock market such as that of Indian stock market. This is what in this study an attempt is made to investigate the stock market response just about bonus issue declaration in relation to equity share with reference to alterations in cumulative atypical earnings and alterations in liquidity and further an endeavor is made to make out the significant factors that would have enabled alterations in cumulative atypical returns. This study is conducted considering the proposition that the response of bonus issue declaration could diverge as per the scenery of a specific industry, the study is carried out with definite case to bonus issue declaration. This is based on the rationale that firms necessitate to think about the under response of the stock market in the form of equity value subsequent to the bonus share issuing. Moreover, the results of this study may well assist the people who take policy decisions as regards financial sector to judge the result of their bonus decisions in relation to the firms’ success and prosperity.

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