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The IUP Journal of Applied Finance

Revisiting the Bonus Issue Announcement Effect

Article Details

Pub. Date	:April, 2019
Product Name	: The IUP Journal of Applied Finance
Product Type	: Article
Product Code	: IJAF51904
Author Name	: Heena Basra and Ravi Singla
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 12

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Abstract

The paper, through a comprehensive literature survey, attempts to derive some conclusive results regarding the effects of bonus issue announcement on the capital market. The in-depth review of worldwide studies indicated the presence of abnormal returns around the bonus issue announcement, confirming the signaling hypothesis. The findings also suggested the enhanced liquidity and volatility around this event. Some of the studies confirmed an improvement in the post-bonus issue operating performance. The literature also supported the argument of positive relationship between the share price and the quantum of bonus announced. Though theoretically the bonus issue announcement is considered to be a cosmetic event that does not create any value for the shareholders, the literature empirically supported the various arguments against this theory. The contribution of this paper is to provide clarity in this regard to financial analysts and investors.

Description

Firms’ financial decisions are continuous and inevitable. To rationalize those decisions, every firm has a set of multiple goals, and foremost of them is shareholders’ wealth maximization. Shareholders are the most crucial members of the company who are directly affected by these decisions. They are the people who have taken the risk to invest their money in the company. So, they must be rewarded with adequate amount of returns for bearing risk. There are various ways in which they can be rewarded, and one of them is distribution of free shares by way of bonus issue.