CAPITAL MARKET REACTION AROUND STOCK SPLITS AND

BONUS ISSUES: EVIDENCE FROM INDIAN CAPITAL MARKET

A dissertation submitted in partial fulfilment of the
requirements for the award of the degree of


MASTER OF BUSINESS ADMINISTRATION


By

NIRMOY DEY
Register No 0920016


Under the guidance of

DR ANIRBAN GHATAK






Institute of Management
Christ University, Bangalore
March 2011





DECLARATION


I, Nirmoy Dey, do hereby declare that the dissertation entitled Capital Market Reaction
around Stock Splits and Bonus Issues: Evidence from Some Indian Capital Market has been
undertaken by me for the award of the degree of Master of Business Administration. I have completed
this study under the guidance of Dr Anirban Ghatak, Assistant Professor, Department of Finance,
Institute of Management, Christ University, Bangalore.
I also declare that this dissertation has not been submitted for the award of any degree, diploma,
associateship or fellowship or any other title in this University or any other university.


Place: Bangalore (Name & Signature of the Candidate)
Date: Nirmoy Dey
Register No 0920016


















ii





CERTIFICATE


This is to certify that the dissertation submitted by Mr Nirmoy Dey on the title Capital Market
Reaction around Stock Splits and Bonus Issues: Evidence from Indian Capital Market is a record
of research work done by him during the academic year 2010 11 under my guidance and supervision
in partial fulfillment of Master of Business Administration. This dissertation has not been submitted for
the award of any degree, diploma, associateship or fellowship or any other title in this University or
any other university.


Place: Bangalore (Name & Signature of the Guide)
Date: Dr Anirban Ghatak










iii


ACKNOWLEDGEMENTS



I am indebted to many people who helped me accomplish this dissertation successfully.
First, I thank the Vice Chancellor Dr Fr Thomas C Matthew of Christ University for giving me
the opportunity to do my research.
I thank Prof. Ghadially Zoher, Associate Dean, Fr Thomas T V, Director, and Prof T S
Ramachandran, Head-Finance of Christ University Institute of Management for their kind support.
I thank Dr Anirban Ghatak, for his support and guidance during the course of my research. I
remember him with much gratitude for his patience and motivation, but for which I could not have
submitted this work.
I thank my parents for their blessings and constant support, without which this dissertation
would not have seen the light of day.


Nirmoy Dey
Register No: 0920016


















iv



ABSTRACT


Purpose The thesis aims to clarify the relationship between organizational structures and
individual brand supporting behavior. It proposes modeling the social transformation process and
outlining why and how leadership is important throughout the internal brand building process. The
study aims to expand the domain of corporate branding by including a broader range of human resource
and leadership-related aspects than is normally found in the branding literature.
Design/methodology/approach The thesis opted for an exploratory study using the open-
ended approach of grounded theory, including 30 depth interviews and one expert group discussion
with employees representing middle and senior management having mainly a marketing and corporate
communications background. The data were complemented by documentary analysis, including brand
documents, descriptions of internal processes, and copies of employee magazine articles.
Findings The thesis provides empirical insights about how change is brought about during
internal brand building. It suggests that successful leaders act as integrating forces on two levels:
integrating the elements of corporate identity structures, and mediating between the corporate branding
structures and the individual.
Research limitations/implications Because of the chosen research approach, the research
results may lack generalisability. Therefore, researchers are encouraged to test the proposed
propositions further.
Practical implications The thesis includes implications for the development of a powerful
brand image, the development of brand ambassadors and for managing the balance between stability
and change.
Originality/value This thesis fulfills an identified need to study how brand-supportive
behaviour can be enabled.
Keywords: Brand management, Corporate branding, Leadership, Social change












v


TABLE OF CONTENTS

Declaration ii
Certificate iii
Acknowledgements iv
Abstract v
Table of Contents vi
List of Tables viii
List of Charts ix
Abbreviations x

CHAPTER I
INTRODUCTION
1.1 BACKGROUND OF THE STUDY 1
1.2 NEED AND RATIONALE OF THE STUDY 3
1.3 PURPOSE OF THE STUDY 4
1.4 SIGNIFICANCE OF THE STUDY 4
1.4 RESUME OF SUCCEEDING CHAPTERS 5
CHAPTER II
REVIEW OF LITERATURE
2.1 INTRODUCTION 7
2.2 HOW REVIEW HAS BEEN CONDUCTED 7
2.3 STUDIES CONDUCTED ABROAD 10
2.4 STUDIES CONDUCTED IN INDIA 16
2.5 CONCLUSION 20
CHAPTER III
RESEARCH METHODOLOGY
3.1 INTRODUCTION 22
3.2 STATEMENT OF THE PROBLEM 22
3.3 OPERATIONAL DEFINITIONS OF THE VARIABLE
UNDER INVESTIGATION 23
vi


3.4 VARIABLES UNDER INVESTIGATION 25
3.5 RESEARCH QUESTIONS 26
3.6 OBJECTIVES OF THE STUDY 26
3.7 HYPOTHESES 27
3.8 POPULATION AND SAMPLE OF THE STUDY 27
3.9 SAMPLING TECHNIQUE 28
3.10 EXPLANATION ABOUT THE INPUT 28
3.11 TOOLS ADOPTED FOR THE STUDY 33
3.12 PILOT TEST AND RELIABILITY OF THE INSTRUMENTS 35
3.13 STATISTICAL TECHNIQUES AND ANALYSIS 38
3.14 LIMITATIONS OF THE STUDY 40
3.15 CONCLUSION 41
CHAPTER IV
INDUSTRY OVERVIEW
4.1 CAPITAL MARKET IN INDIA 43
CHAPTER V
DATA ANALYSIS AND INTERPRETATION
4.1 INTRODUCTION 74
4.2 RESPONDENT PROFILE 75
4.3 QUANTITATIVE / QUALITATIVE ANALYSIS 84
4.4 TESTING OF HYPOTHESES 85
CHAPTER VI
FINDINGS, CONCLUSION AND SUGGESTIONS
5.1 FINDINGS 88
5.2 CONCLUSION 90
5.3 SUGGESTIONS 91
5.4 SUGGESTIONS FOR FURTHER RESEARCH 95
BIBLIOGRAPHY 97
APPENDIX 98
vii



LIST OF TABLES

S No Title Page No

Table 4.1 Share price performance on stock splits or bonus issues 77
Table 4.2 CAAR across different event windows 78
Table 4.3 Paired t-Test for Pre & Post Bonus Announcement AAR 79
Table 4.4 Paired t-Test for Pre & Post Stock Splits Announcement
AAR
80
Table 4.5 t-value for Cross sectional AR for Event Window (Bonus
Issue)
81
Table 4.6 t-value for Cross sectional AR for Event Window (Stock
Splits)
82
Table 4.7 Chi-Square Test Results 83














Viii


LIST OF CHARTS

S No Title Page No

4.1 CAAR for Bonus Issues 48
4.2 CAAR for Stock Splits 54
4.3 Term of investments for the respondents 55
4.4 Investment Appreciation 55
4.5 Factors influencing investors decisions 56
4.6 Source of information for bonus issue or stock split 56
4.7 Intuition about price movement after bonus issue or stock
split announcement
57
4.8 Response for no abnormal return around announcements 85
4.9 Response for investment during announcements 85
4.10 Response for Insider information leakage 85
4.11 Response for fundamentals of the company 85
4.12 Response for liquidity effect after announcements 85
4.13 Response for alteration of investment strategies 85





















ix


ABBREVIATIONS

ADB Asian Development Bank
ANOVA Analysis of Variance
ATM Automated Teller Machine
B2B Business to Business
B2C Business to Consumer
BL Market Value of Firm's Debt
BSE Bombay Stock Exchange
CCEA Cabinet Committee on Economic Affairs
CEO Chief Executive Officer
COP Coefficient of Performance
D Value of Used Debt
D/E Debt Equity Ratio
DC Development Commissioner
DESIGN

Design Clinic Scheme for Design Expertise to MSMEs Manufacturing
Sector



















x







CHAPTER I
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1.1 BACKGROUND OF THE STUDY
Growth of the corporate sector is important in the process of economic development.
Apart from big industries, Small and Medium Enterprises (SMEs from now on) also contribute
to the expansion of the directly productive sector in the economy, generating tax revenue for the
government, helping poverty reduction through fiscal transfers and creation of income from
employment as well as ownership of firms. It is imperative for SMEs in developing countries to
be able to finance their activities and grow over time if they are to play an increasing role in
providing employment and income in terms of wages to households, profits, as well as
dividends to investors.
To understand how firms in developing countries, particularly SMEs, finance their
operations, it is necessary to examine the determinants of their capital structure and the
decisions on finance. A wide range of policy issues affect the financial decisions of companies.
At the macro level, they have implications for capital market development, interest rate, security
price determination and regulation. At the micro level, such decisions affect capital structure,
corporate governance and overall development of the company (Green, 2002). Knowledge
about capital structure has mostly been derived from data pertaining to developed economies
that have many institutional similarities (Booth, Aivazian, Demirguc-Kunt, and Maksimovic,
2001). It is important to note that different countries have different institutional arrangements,
mainly with respect to their tax and bankruptcy codes, mergers and acquisition and securities
market. There are also differences in social and cultural issues apart from the levels of economic
development. These differences actually give a warning to take a thorough look at the issue of






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CHAPTER II


























2.1 INTRODUCTION
Review of literature is an important link between the research proposed and the studies
already done. It tells us about aspects that have already been established or concluded by
other authors, and gives a chance to appreciate the evidence that has been collected by
previous research, and thus project the current research work in the proper perspective.
Review of literature is also important to highlight differences in opinions, contradictory
findings or evidences, and the different explanations given for their conclusions. In some
cases, an analysis of these factors can help one understand many facets of a complex issue and
at other times such analysis can lead to new possibilities that can be researched upon in the
current project. Sometimes, if the research proposed by one has already been undertaken
earlier, it provides an option for modifying the work by adding a new perspective or altering
some of the methods of research to obtain a perspective that will be different from earlier
works and thus more valuable. Occasionally, the work may be an exact repetition of the work
done earlier but with a different set of data or sources of facts; then the purpose of the
research may be just to relate if the results are similar to earlier works or otherwise. Thus,
review of literature is a very important part of one's research.
Over the past four decades, most of the studies on corporate finance have rotated around
different theories that try to fully explain the factors behind financing policy and capital
structure. These theories cover various aspects of the firm that can explain how firms choose
their capital structure. The current chapter presents a comprehensive review of theoretical and
empirical literature on capital structure and finance of SMEs. Section 2.2 covers review of
theoretical literature. Section 2.3 is devoted to theoretical prediction of variables that have
been found by a large






7









CHAPTER III


3.1 INTRODUCTION
Research is the journey from known to unknown or from problem to solution. Research
methodology refers to the design of the study method and processes by which data is gathered
for a research project. It includes the blueprint for the collection, measurement, and analysis of
data to achieve the objectives of a research project. Research methodology is important in a
research work because it specifies the research design. Here the researcher explicitly defines the
operational definitions of the concepts used in the research and defines the variables that have
been included in the study. Research methodology is also important in a research work because
it also specifies the sampling design. The researcher also defines the target population and the
sampling method used. The researcher also provides the rationale for choosing a specific
sampling method. Additionally, the researcher identifies the data collection method. This could
be self-administered questionnaires, postal surveys, or interviews. Finally, the researcher
focuses on the limitations of the research. The researcher identifies significant methodology or
implementation problems such as sampling errors, response and non response errors and the
constraints of cost and time. This chapter attempts to explain the survey at hand in terms of the
study area, the study unit and the population. Further, the chapter highlights the organization
and design of the questionnaire as well as the methods of data collection and data analysis. The
data collection instrument employed in the investigation, the administration of the instrument as
well as their reliability and validity are also described. Finally, the chapter examines the
different statistical tests used to analyze the gathered data, the reliability, and the validity of the
results as well as the limitations in the collection of the data.









22








CHAPTER IV


















4.1 INTRODUCTION
SMEs are important worldwide and their contributions are being recognized globally.
The influence of SMEs on the economy is of major importance. In addition to their key role as
providers of employment, they initiate technological innovation, play a role in the production of
new products and the establishment of new businesses, and support large businesses as suppliers
and subcontractors. Small business is important worldwide and the World Bank estimates that
one of the strongest factors in the growth of any nations GNP is the presence of SMEs. Today,
widespread efforts are being made in almost all nations to encourage the development of SMEs.
For these reasons, small businesses deserve much more attention, especially with regard to
management education. It is against this background that the role of SMEs in the Indian
economy is discussed.

4.2 INDIAN DEFINITION OF SMEs
According to the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006
MSMEs are defined based on their investment in plant and machinery (for manufacturing
enterprise) and equipment for enterprises providing or rendering services. The limit on
investment for enterprises to be classified as micro, small and medium enterprises is shown in
table 4.1. While calculating the investment in plant and machinery/equipment, the original price
thereof is taken into account, irrespective of their new or second hand value. SMEs include
Micro, Small and Medium Enterprises (MSMEs). The definition of Micro, Small and Medium
Enterprises has replaced the existing definition of Small and Medium Industries and
SSSBEs/Tiny Enterprises.
Micro Enterprises include Tiny Industries also.








43










CHAPTER V


5.1 INTRODUCTION
In the background of the methodology of the study outlined in chapter 3 and the
overview of Indian SME sector in chapter 4, the researcher presents a micro analysis of the
determinants of capital structure and finance of SMEs in this chapter. The plan of the chapter
consists of: an analysis of secondary data in part one; profile of respondents of the sample
survey in part 2; and finally an analysis of primary data in part 3.

5.2 SECONDARY DATA ANALYSIS
For the present study, secondary data on manufacturing and service SMEs was accessed
from the Prowess database. Initially by giving the search option in the Prowess data base
adhering to the definitions of an SME as specified in chapter 4 (refer to section 4.2, p. 88) the
researcher has obtained financial statement of 6592 manufacturing and 1798 service-based
SMEs. But due to lack of consistency of those data and keeping in view the potential variables
influencing capital structure, the relevant data pertaining to 1634 manufacturing and 364 service
SMEs, for a period of 5 years (2006 2010), is used for the study. The lack of consistency of
the data was mainly because of the following reasons:
1. Data gaps in some enterprises;
2. Few companies were new; and
3. Some companies had been closed down.
Unfortunately, this drastically reduced the sample available for secondary data analysis.

5.2.1 DESCRIPTIVE STATISTICS OF THE SECONDARY DATA (Times of Roman 12)
The following table depicts the descriptive statistics of the secondary data of
manufacturing and service SMEs.




74







CHAPTER VI

6.1 INTRODUCTION
In this chapter the findings from the study are presented in the light of the proposed
research objectives. In the above background, the theoretical and methodological contributions
made by this study to the existing body of literature are also presented. Following this the
managerial and policy implications of the study are also highlighted. The chapter then
concludes by presenting the limitations of the present study and suggestions for future research.

6.2 DISCUSSION OF RESEARCH FINDINGS
The main goal of the study is to examine the factors that determine the capital structure
and finance of SMEs in the Indian context and assess the applicability of financial theories of
capital structure to SMEs. The study also sets out to examine whether other theoretical
perspectives could be utilized to explain the capital structure decisions of Indian SMEs.

6.2.1 FINDINGS RELATED TO SMEs CAPITAL STRUCTURE
Factors Affecting SMEs capital Structure
From the selected determinants of Capital Structure of SMEs (profitability, liquidity, NDTS,
size, dividend, growth, investment, uniqueness, government policy, collateral, default risk
and effective tax rate), for both manufacturing and service SMEs, profitability is found to be
the most important factor.
Similarly, for profitability as a determinant at L 1, industry growth is the common consistent
factor among both types of SMEs at L 2.
For liquidity as a determinant of SMEs capital structure at L 1, for both types of SMEs,
debtors turnover is the most important factor at L 2.
It is noted from the study that for all types of SMEs, leverage is the most consistent factor in
the case of NDTS as a determinant of capital structure.






74


























BIBLIOGRAPHY

Abor, J., & Biekpe, N. (2007). Small business reliance on bank financing in Ghana. Emerging Markets
Finance and Trade, 43(4), 93 - 102.
Adedeji, A. (1998). Does the pecking order hypothesis explain the dividend payout ratios of firms in
the UK? Journal of Business Finance and Accounting, 25(9 & 10), 1127 - 1155.
Alan, A., & Danbolt, J. (2000). Capital Structure and its Determinants in the U.K. Department of
Accounting and Finance University of Glasgow, Working Paper G12 8LE.
Alexander, V. D., Thomas, H., Cronin, A., Fielding, J., & Moran-Ellis, J. (2008). Mixed methods. In:
Gilbert, N. (Ed.) Researching social life. London: Sage.
Allen, D. E. (1993). The pecking order hypothesis: Australian evidence. Applied Financial Economics,
3(2), 101-112.
Alti, A. (2006). How persistent is the impact of market timing on capital structure? Journal of Finance,
61, 1681-1710.
Ang, J. S. (1992). On the theory of finance for privately held firms. The Journal of Small Business
Finance, 1(3), 185-203.
Ang, J. S. (1991). Small business uniqueness and the theory of financial management. The Journal of
Small Business Finance, 1(1), 1-13.















































Table & Charts
(If Copied/ referred from somewhere else)
Table 2.1: Main elements influencing capital structure
Elements Equity preference Debt preference
Market elements High interest rates Low interest rates
Scarce financial resources Capital very available
Higher stock price Low stock price
Industry elements New industry Mature industry
Growing Declining
High risk Low risk
Source: Sheehan and Graham, (2001), p. 5.

(Space single, Times of Roman 12),
(Source: Times of Roman 10, Specify the Author, Year and Page)

Chart 4.1: Product groups of MSMEs

Source: MSMEs: Annual Report 2010-11, p. 24.
(Space single, Times of Roman 12),
(Source : Times of Roman 10, Specify the Author, Year and Page)

(If made by own)
Table 5.4: ANOVA table for manufacturing and service SMEs
Model Sum of Squares Df Mean Square F p

1
Regression 15764.014 10 1576.401 1800.535 .000
Residual 1420.966 1623 0.876
Total 17184.98 1633

2
Regression 15573.39 10
1557.339 2539.806 .000
Residual 216.45 353
0.613
Total 15789.84 363
Source: Secondary Data.
(Specify the data source)