Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.8, No.1, 2017 28 Analysis of Market Reaction Around the Bonus Issues in Indian Market Dhanya Alex Ph.D Associate Professor, FISAT Business School, Mookkannoor, Angamaly, Kochi, PO Box 683577, India Abstract When the companies accumulated huge profits and reserves, and it desires to capitalize these profits the companies will go for issuing bonus shares. The present study is an attempt to study the stock price reaction to bonus share announcements and ex-bonus date of listed Indian companies during the period 2015. Fifty seven companies which have come up with the bonus issue were considered for this study. Event study methodology was adopted in order to understand the volatility of stock returns. The abnormal returns and cumulative abnormal returns was calculated to understand the effect of these events on the share price. It was found that the stock prices do not react to bonus share announcements and ex- bonus dates. Keywords: Bonus Share, Event Study, Stock Volatility 1. Introduction Bonus issue is a manner in which firms convert cash reserves into share capital. Shareholders do not have to pay for these shares because the cash which has been converted into share capital already belongs to shareholders. To give bonus shares to investors, a company builds a reserve by retaining a part of its profit over the years (the part that is not paid as dividend). When these free reserves increase, the company transfers a part of the money into the capital account, from which it issues bonus shares. The objectives of issuing bonus shares is to bring the amount of issued and paid up capital in line with the capital employed so as to depict more realistic earning capacity of the company and to bring down the abnormally high rate of dividend on its capital. The firm may also go for bonus issue when the company cannot have sufficient cash balance to declare dividends. The net effect of that will be an increase the number of shares which can get reflected as lower share price. The relationship between bonus issues and their impact on share prices has been a constant source of discussion among researchers for the past few years. A Bonus issue refers to the issuance of free additional shares to the existing shareholders based upon the number of shares that the shareholders already own. Bonus issue though increase the number of equity shares outstanding but they don’t have any effect on shareholders proportional ownership of shares. This is because, if accumulated reserves of a company are distributed through a bonus issue, effectively it is just a transfer of retained earnings into paid up share capital of the company. Thus, relative claim on the assets of a company by the existing shareholders remain the same even though they now hold an increased number of equity shares. But though the bonus issue dates are well known in advance and as such shouldn’t contain any new information, empirical studies on the topic have affirmed a significant market price reaction on the bonus issue announcement. This is against the theoretical prediction that any such significant market price reaction shouldn’t be expected. Thus, it is important for the company issuing bonus shares, existing shareholders of the company as well as all the other stakeholders of the company, to know, if the announcement of a bonus issue will impact the share price of a company and if yes, how? This research paper is an attempt to deal with the above problem. Though a number of studies have documented the evidences on the impact of bonus issue on stock returns in India, the results remain inconclusive. A lot of differences do exist in the results of such studies which had taken place at different time frames. There are mixed results for volatility changes around bonus share announcements made by the firms at different time periods in Indian market. The present study is an attempt to study the very recent market reactions around bonus issue announcements made by the Indian firms during 2015, by studying the volatility of stock prices with event study method. 2. Literature Review The review of existing literature shows that event announcements bring about changes in stock price volatility. Event announcements are of many types, the most prominent ones being earnings announcements, dividend announcements, listing announcements, bond issue announcements, stock split announcements and bonus share announcements. Many researchers in the past had tried to comprehend the impact of various corporate announcements on the firm valuation and stock market reactions. The findings were mixed in nature and it varied at different time periods across different markets for different events. To understand the impact of corporate announcements on stock price volatility, various researchers have adopted different approaches. The most prominent methodologies adopted by most of the researchers were event study and econometric tools for time series data analysis. Lee and Chang (2011) used the financial econometric models like asymmetric generalized autoregressive conditional heteroskedasticity (GARCH) model