Bonus Issue Announcement

Topics: Stock market, Stock, Stock exchange Pages: 14 (4354 words) Published: December 17, 2010
EFFECT OF BONUS ISSUE ANNOUNCEMENT ON STOCK RETURNS
Bonus Shares
The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits - much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the company when it has large accumulated profits as well as cash to pay dividend. Many a time, a company is not in a position to pay bonus in cash in spite of sufficient profits because of unsatisfactory cash position or because of its adverse effects on the working capital of the company. In such a position, the company pays a bonus to its shareholders in the form of shares; a free share thus issued is known as a bonus share. A bonus share is a free share of stock given to current/existing shareholders in a company, based upon the number of shares that the shareholder already owns at the time of announcement of the bonus. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus share is free share in fixed ratio to the shareholders. for exp..reliance ind. ltd. issue bonus share in 1:1 ratio and Rs.13.00 as dividend/share Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. Main reason for issuance is the price of the existing share has become unwieldy. Benefits of bonus issue

* Conservation of Cash. The issue shares allows the company to declare a dividend without using up the cash that may be used to finance the profitable investment opportunities within the company and thus company can maintain its liquidity position. * Under Financial Difficulty and Contractual Restrictions. When a company faces stringent cash difficulty and is not in a position to distribute dividend in cash, or where certain restrictions to pay dividend in cash are put under loan agreement, the only way to satisfy the shareholders or to maintain the confidence of the shareholders is the issue of bonus shares. * Remedy for Under-Capitalization. In the state of under-capitalization, the rate of divided is very much high. In order to lower down the rate of dividend, the company issued bonus shares instead of paying dividend in cash. * Widening the Share Market. If the market value of a company's share is very high, it may not appeal to small investors. By issuing bonus shares, the rate of dividend is lowered down and consequently share price in the market is also brought down to a desired range of activity and thus trading activity would increase in the share market. Now small investors may get an opportunity to invest their funds in low priced shares. * Economical Issue of Securities. The cost of issue of bonus shares is the minimum because no underwriting commission, brokerage etc. is to be paid on this type of issue. Existing shareholders are allotted bonus shares in proportion to their present holdings. Stock prices as a rule adjust to new information. In an efficient market, this adjustment is instantaneous and accurate. Event studies to test market. Efficiency, therefore, examine the speed of adjustment of stock prices to the release of new, relevant information to investors. One such 'event' is the announcement of bonus issues by companies. While accountants view...

References: A. Marsden, Shareholder wealth effects of rights issues: evidence from the New Zealand capital market. Pacific- Basin Finance Journal 8, 2000, 419–442.
Anjel, J (1998), “ Tick Size, Share Prices, and Stock Splits,” Journal of Finance, Vol. 52, pp.655-681.
Barnes, M. L., & Ma, S. (2000), The Behaviour of China’s Stock Prices in Response to the Proposal and Approval of Bonus Issues, Working paper, University of Adelaide, Australia
Brennan, M
Journal of Finance, 46(5), 1665-1691.
Brennan, M.J., and T.E. Copeland, 1988, Stock splits, stock prices, and transaction costs, Journal of Financial Economics, 22,83-101.
C. G. Lamoureux, & P. Poon, The market reaction to stock splits. Journal of Finance, 42, 1987, 1347–
1370.
Fama, E F, L Fisher, M Jensen and R Roll (1969), “The Adjustments of Stock Prices to New Information,” International Economic Review, Vol 10, pp.1-21.
Grinblatt, MS, Masulis R W and Titman, S (1984), “The Valuation Effects of Stock Splits and Stock Dividends,” Journal of Financial Economics, Vol. 13:4 (Dec), pp. 461-90.
Guneratne, P.S.M., & Fernando, K.G.K., (2007)Market Response to Bonus
Issues with Special Reference to Impact of Bonus Issue Ratio and Ex-day Price
Adjustments; Evidence from Colombo Stock Exchange(2007) International
Research Conference on Knowledge for Growth and Development Faculty of
Lijleblem, E (1989), “The Informational Imapct of Announcements of Stock Dividends and Stock Splits,” Journal of Business Finance and Accounting, Vol. 16:5 (Winter), pp.681-98.
McNichols, M and dravid, A (1990), “ Stock Dividends, Stock Splits and Signaling,” Journal of Finance, Vol. 45:3 (July), pp.851-79.
S. C. Myers, &N. S. Majluf, Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 1984, 187–222.
Schuitz, P (2000), “Stock Splits, tick size and sponsorship”, Journal of Finance, 55, pp.429-50.
Sloan, R. G (1987). “Bonous Issues, Share Splits and Ex-day Share Price Behavior : Austrailian Evidence,” Australian Jouranal of Management, Vol. 12
Obaidullah, How do Stock Prices React to Bonus Issues?, Vikalpa, 17(1 ), 1992, 17-22
Foster T.W and Vickrey D (1978) ‘The Information Content of Stock
Dividend Announcements’ Accounting Review, 53:2 (April) pp 360-
370
Woolridge R (1983) ‘Stock Dividends as Signals’ Journal of Financial
Research, 6:1 (Spring) pp 1 – 12
Grinblatt M.S, Masulis R.W and Titman S (1984) The Valuation Effects of
McNichols M and Dravid A (1990) ‘Stock Dividends, Stock Splits and
Signaling’ Journal of Finance 45:3 (July) pp 857 – 879.
Masse, I, Hanrahn, J.R and J. Kushner (1997), ‘The Effect of Canadian
Stock Splits, Stock Dividends and Reverse Splits on the Value of
Anderson, H., Cahan, S. and L. C. Rose (2001), “Stock Dividend in an
Imputation Tax Environment”, Journal of Business Finance &
Lijleblom, E. (1989), The Informational Impact of Announcements of Stock
Dividends and Stock Splits’, Journal of Business Finance and
Papaioannou G.J, Travlos N.G, Tsangarakis, N.V (2000) ‘Valuation
Effects of Greek Stock Dividend Distributions’, European Financial
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Split Share and Bonus Issue of Shares Essay
  • Sebi Guidelines for Issue of Bonus Shares Essay
  • Global Issues Essay
  • Bonus Shares Its Advantages and Disadvantages Essay
  • issue Essay
  • Essay about Contemporary Issues
  • The Bonus Dilemma Essay
  • The Bonus Army Essay

Become a StudyMode Member

Sign Up - It's Free