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.