Bonus Issue Announcement and Share Price: Recent Evidence from CSE, Sri Lanka

The main objective of this study was to examine the effect of bonus issue announcements on
share price by examining firms listed on Colombo Stock Exchange (CSE) as a developing
market. In addition, as secondary objective, based on the findings pertaining to the first
objective, whether the Sri Lankan capital market is in the semi-strong form of the Efficient
Market Hypothesis (EMH) is examined. The time period of the study is from 2007 to 2017 to
study share price reaction to bonus issue announcements and to measure informational content of
bonus issue announcements in Sri Lanka. Standard Event Study Methodology established by
Brown and Warner (1980, 1985) adopts to compute abnormal returns on the CSE using
secondary data from electronic database of the CSE, annual reports of the sample firms and fact
book of the CSE. Further, Average Abnormal Returns (AARs) and the Cumulative Average
Abnormal Returns (CAARs) were analyzed and student t-test analyses were used to test the
differences for significance. The results of the study showed that the share prices reacted to the
announcement of bonus issue. Therefore, it can be concluded that bonus announcement
contained information useful for valuing the shares. The study recommended that stock market
may use that information to revise the prices of securities and the investors are advised that when
the firm comes up with the bonus issue, the investor should take immediate investment decision
(buy or sell) in order to benefit from the bonus issue announcement.
Keywords: bonus issue announcements, efficient market hypothesis, share price