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CHAPTERS ONE

INTRODUCTION

1.0 Overview of Stock Splits

The relationship between stock splits and stock prices has been a question for the

investor. Stock splits have been an important event to investor. It usually occur after an

increase in stock prices and usually to show a positive stock price reaction when the

announcement. The reaction should occur after the announcement.

A stock split is a reduction of the par value and increase in the number of shares

proportionate to the split. Theoretically, shareholders receive no tangible benefit from a stock

split, while there are some costs associated with it. “Splits are at one level only cosmetic

change, slicing the same pie into smaller pieces but not changing an investor's fractional

ownership of the equity interest and votes in the company. (Lamoureux and Poon, (1987),

“The effect of stock splits on liquidity and excess returns: Evidence from shareholder

ownership composition, pp.19).This means that if managers could increase share prices by

splitting their firm's stock, both overvalued and undervalued firms will choose to split their

shares, eliminating the informational content of the decision. Many investors in the stock

market feel that splitting the shares of a stock, for various reasons, a greater total market

value for the shares. This implies that there must be some benefit from a firm splitting its

stock.

Many theories and observed indication for stock splits exists in the market. This paper

aims the explaining the effect of stock splits in Malaysia stock return over 6 years (2005 –

2010).

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1.1 Background of the Study

What is a stock split? Stock splits are big event for some traders. There are also

several reasons why a stock will split. Splits offer some opportunities that take advantages of

the public rushing in on a stock split. Even though many splits are announced after the end

of the trading day, the stock can become active by either split anticipation or split

announcement. There is news after a stock splits announcement.

There is every reason to believe that stock splits are without cost of the price of a

company’s stocks. “Since splits are just a better slicing of a given cake” (Lakonishok (1987)”

Stock splits in Switzerland: to signal or not to signal?”), without altering future cash flows of a

company, one would expect that stock prices do not react to the announcement and

execution of stock splits. There is only changing a ten Ringgit Malaysia into two five Ringgit

Malaysia. By splitting, the invested capital is spread over a larger number of stocks with

accordingly smaller values.

The question of why companies consider splitting their stocks. If there are no gains to

be expected from splitting a company’s stocks, but transaction cost have to be borne (bank

commissions, expenses for printing publication etc), it does not make much to carry out such

operations. The costs for splitting are mainly depend on the size of a company.

There are two great reasons to how to trade stock splits. First, when stocks moving

up, there are few things that can move a stock up like the news of an upcoming split.

Second, bull markets and stock splits go hand in hand. If the market keeps rising, stock will

keep splitting. Even with the not often market improvement, splits are occurring more and

more frequently simply due to the fact that many stock prices are at highs.

Stock splits are frequently accompanied by favourable news of revaluations of asset

or by forecast of higher dividends. Stock splits also serve to remind investors of the firm’s

ability to pay cash dividends. Research on the announcement effect of stock splits in several

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developed capital market participants for gather share prices of announcing firms. The

market makes advance forecast of the information content and is generally efficient in that

the prices adjust quickly and fully to new information contained in this announcements

(Fama, Fisher, Jensen and Roll 1969; Long-term Performance after Stock Splits: A Closer

Look”).

This study covers 40 companies, on the Kuala Lumpur Composite Index (KLCI),

which splits their common stock in the period from 2005 to 2010 on the basis of not less than

two shares to one.

Therefore it focuses on the applicability of the return of that company did stock splits

in all sectors at Kuala Lumpur Composite Index (KLCI) by using buy-and-hold abnormal

return. The findings determine whether this strategy is efficient to be applied in investment

decision-making.

1.2 Problem Statement

The main issue in this study is to identify the abnormal return compare to the market,

in all sectors to see whether company outperformed or underperformed based on the main

indicator of the Malaysian stock market, Kuala Lumpur Composite Index (KLCI).

In addition, this study also want to examine whether the stock splits can be use as an

indicator to make abnormal return, hence, maximizing the return.

In this study, it is to determine the effect of stock splits announcement on the

Malaysian market for the 6-year period from 2005-2010. It is to identify whether the company

that do stock splits outperform or underperforms compare to the market (KLCI). The main

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point is, to determine the effect of stock splits announcement on the stock return

characteristic.

To determine the effect of stock splits announcement on the stock return, this study

requires the list of companies that do stock splits and its announcement date. The

companies are taken from various sectors from the main market.

The company’s total return index are then gathered for the period of 30 days before

the announcement date and 30 days after the announcement date within the time frame

(2005-2010) as well as market total return index (KLCI).

This study covers 40 companies that have done the stock splits within the period of

2005-2010. The data gathered are then analyzed and the abnormal returns are calculated

for each day. Even though previous findings and result shows the stock splits return get

abnormal capital gains, however it cannot be said that, this strategy can be used to make

abnormal return, because there might be other factors involve in determining the

performance of the stock. As a result, this study will examine whether the category of stocks

i.e. company that doing stock splits have positive impact to the market and whether this

strategy can be used as investment strategy.

1.3 Research Questions

In this study, there are several research questions that has been developed

regarding the problem statement occurred. These research questions can be:

1) Whether the stock splits approach provides better investment return than market

(KLCI)?

2) Whether the stock splits indicate a higher return or vice versa?

3) Whether the stock splits can be use as an indicator to make abnormal return?

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1.4 Research Objective

This study is to evaluate whether the company return provided by the companies that

do stock splits is higher or not. These 40 companies that do stock splits will be selected as a

sample to test whether they will outperform or underperforms the main indicator of the

Malaysian stock market, namely the Kuala Lumpur Composite Index (KLCI). The objectives

of this study are as stated below:

(i) To determine the effect of stock splits announcement on

overall Malaysian companies’ stock returns.

(ii) To determine the effect of stock splits announcement on main

market of Bursa Malaysia.

1.5 Significant of study

This research will give useful and valuable information to investor on the stock

reaction when the news of stock splits is announced. It is also providing a view of investment

strategy since many investors are not very familiar with this situation. In addition this

research gives information what is stock splits strategy, whether it can be used as

investment decision indicator or vice versa. It also wants to strengthen the results from

previous research studies.

This research also can act as a reference for those who are interested to look at the

situation of stock splits investment strategy. Besides that, it may provide further information

in order to improve other studies in the future.

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1.6 Scope of Study

This study is undertaken to determine the performance of stock splits companies’

investment approach at the Bursa Malaysia. The performance of this stock splits companies’

investment approach can be defined as whether the companies perform well or not by

comparing with the market performance that is Kuala Lumpur Composite Index (KLCI). The

scope of this study includes the following:-

i. The companies doing stock splits in main board of the

Bursa Malaysia.

ii. To focus on the abnormal return whether outperform or

underperforms the main indicator of the Malaysia stock

market (KLCI).

iii. The time period of this covers six (6) years i.e. from

2005 to 2010.

1.7 Limitation of the Study

Some constrains have been encountered during the preparations of this study, such

as follows:-

(i) Time constraint

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Time allocated for this research paper is limited to only one semester

that joint with the practical. Therefore a good and comprehensive

study is difficult to carry out.

(ii) Lack of experience and knowledge

Since this is the first time, the researcher admits the lack of the

experience and knowledge in conducting this study. However, the

researcher had tried his best to complete this study successfully.

(iii) Accuracy and reliability of data

Since the data used in this research is mainly from various secondary

sources. Its accuracy and reliability depend heavily on the accuracy of

the published materials. Only 40 companies that announce stock splits

can be taken due to the reliability of the available data.

(iv) Results does not represent the real market performance

This is due to different weighted on the sample of companies under

study. Sample is not determining the real market performance.

1.8 Summary

The effect of stock splits is the important thing need to be discussed for financial

institutions. It involving all parties especially shareholders to value their share. The investors

also need to make the right decisions in making their choice in investment. This study will

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examine the effect of stock splits to the market return. All the factors involve will be tested in

40 companies that do the stock splits from 2005 until 2010.

CHAPTER 2

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter consists of previous studies, related data and report that are related to the

stock splits performance. This section is very important as it can support and disagree the

study being proposed. Literature review also can be said as the main reference in order to

complete this project paper. The literature review mostly comes from related journal, articles,

textbooks, etc.

2.1 Previous Study

2.1.1 The Trading Range

The (Fama, Fisher, Jensen and Roll (1969), “Long – Performance After Stock

Split”) provided evidence abnormal price reaction following stock splits, and

numerous studies supporting these early finding (e.g. Charest, 1978, Grinblatt,

Masulis and Titman, 1984, and Lakonishok 1987), the academic community still

seems to be at odds with this phenomenon. Why would a management choose for a

stock split, and, how it can a change in a company’s stock return behaviour.

Early studies by Myers and Baker (1984), Baker (1956), and Johnson (1966)

reported positive stock price appreciation net of market price indexes in the period

preceding the split. Lakonishok and Lev (1987) argue that management’s decision to

split the firm’s stock is determine by the stocks past performance. In their sample of

1015 stock splits, stock prices of splitting firm outperformed a control group on

average by almost 70% over the course of 5 years prior to the split.

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According to McNichols and Dravid (1990), it is this pre-split price run-up that

triggers the stock split as management pursues its preferred price range. The authors

support the trading range hypothesis by claiming a positive relationship between

abnormal returns and the splits factor.

According to Ross (1977) and Leyland and Pyle (1977), managers might use

financial decisions such as stock splits to convey favourable private information

about the current value of the firm. However, this signalling hypothesis can only be

valid if false signalling incurs a cost. Lamourex and Poon (1987) argue that no such

cost exist and, thus, that a split could even be interpreted as a negative signal, that

is, that the management feels that its stock price has peaked. Brennan and Copeland

(1988), on the other hand, pointed out that a split imposes cost on current

shareholders of the firms. Since each old share is not replaced with an integral

number of new shares, investors who previously owned round lots find themselves

with more expenses to sell odd lots. The authors further suggest that do not split by a

factor larger than is warranted by their support the nation of increased transaction

cost to be an inverse function of stock price, the case for costly signal by stock splits

remains unclear, Lakonishok and Lev (1987).

Ikenberry, Rankine and Stice (1996) combine the trading range hypothesis

with the signal hypothesis by stating that manager’s use splits to move share prices

into a trading range they perceive to be optimal, but condition their decision to split

on expectation about the future performance of the firm.

Fama, Fisher, Jensen and Roll (1969) attributed the price reaction to stock

splits to market’s assessment of likely future dividend changes rather than to the

stock split itself. The information implied in the split is, on average, fully reflected in

the prices immediately after the announcement dates. However, the use of monthly

data may fail to measure the speed of price adjustment to these announcements.

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Ball, Brown and Finn (1975) investigated the market reaction to capitalization

changes in Australia and found that the information effect is attributed to the dividend

implications contained in this announcement; in Australia there is clustering of

dividends and bonus issues. They showed that stock splits that were not

accompanied by subsequent dividend increase showed no price reactions, consistent

with dividend information effect hypothesis. They concluded that the Australian stock

market appears to be efficient with respect to the announcement of bonus issues, as

post – announcement drift fluctuate randomly around zero. Grinblatt, masulis and

Titman (1984), in an American study, found that the price reaction to announcement

of splits and stock dividends is due in part it dividend information effect and in part to

information which is not dividend related.

Neoh (1986) investigated the announcement effect of 182 bonus issues in the

Malaysian share market for the period 1968 – 1983 using weekly data. This study

provides evidence that the market as a whole is not efficient to bonus issues

announcement as there is significant residual movement from 15 weeks before to 4

weeks after the announcements. This study uses a privately constructed index on

which no information is publicly available.

Ann and Keep (1987) studied 88 bonus issues on the Singapore stock market

during 1975-1984 using daily to measure the direction of market response to bonus

issues announcement and ex-bonus share price. They concluded that there is non -

Random – Walk – consistent behaviour of share prices after the announcement of

bonus issues and the price adjustment are not immediate when stock go ex-bonus.

This would means that the Singapore share market is inefficient in pricing the value

of the capitalization changes from these events during the period of study. Ariff and

Finn (1989) examined the price response to capitalization changes in the Singapore

stock market, including a larger sample or 371 bonus issues during 1973 – 1982.

Using monthly data and refined methodology dealing with thinly traded with thinly
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traded stocks as suggested by Dimson (1979) and corrected by Fowler and Rorke

(1983), this provided evidence that the market is efficient with respect to bonus

issues announcement. In fact, prices react over the per 2 – month period and returns

increase by about 14 percent on account of the expected increases in the dividends

following the capitalization changes.

Guo and Keown (1992) studied the impact of dividends and bonus issues

announcement on 40 listed firms on the Hong Kong Stock Exchange using daily data

for the period 1988. using a sample of 188 dividends and 41 bonus issues and

dividend decrease that there is significant market reaction for bonus issues and

dividend decreases at the time of the announcement, although the speed of adjusted

in anticipating the information is slower and last longer compared to U.S market.

2.1.2 History of Bursa Malaysia

The development of stock market in Malaysia is important since it can

contribute to the development of country from time to time. The capital market is

playing a critical responsibility in the economy by mobilizing saving and providing

long term financing for the public and private sectors. This creates political stability

and good macroeconomics policies that enable economic growth and enhancement

for the country.

The stock market serves as an intermediary between the needs of the firms,

and investors. It provides several related function such as risk diversification,

distribution of information, corporate governance and saving mobilization. In general,

the stock market that performs well its function to allocate the financial recourses will

contribute towards the development o Malaysian economy.

The development of the stock market is under the authority of Security

Commission (SC) monitor by Ministry of Finance. The Security Commission was

established in 1993 to supervise the regulation of the security industry. Furthermore,

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it also concentrates on the regulation of the financial futures and option market, unit

and property trust schemes, and the companies’ takeover and merger.

Meanwhile, the Kuala Lumpur Stock Exchange, established in 1973 is a self

regulatory body to carry out the secondary stock market in Malaysia. Before that, the

securities trading were done in Singapore with the introduction of Singapore

Stockbrokers Association in 1930.

The KLSE provides a place for investors to transact with each other, the

securities of Malaysian listed companies on the stock exchange. It also governs its

members and members stock-broking companies in the securities dealing,

implements the standard listing requirement needed for public listed companies and

is responsible to maintain the investors’ confidence by promoting a fair and open

price formation and providing protection and useful information in the market.

There are several actions taken by the KLSE to improve its performance in

handling the stock market in Malaysia. Among them are:

1) The implement of non – paper or

computerized share scripts systems in the November 1983, and the

installation of real – time share price reporting system (MASA) in 1987)

2) The introduction of research Institute of

Investment Analyst Malaysia (RIIAM) in May 1985 to encourage the

education and research in securities industry.

3) The replacement of Industrial Index with

KLSE Composite Index (KLSE CI) to reflect the performance of share

price.

4) The establishment of Advanced Warning

and Surveillance Unit (AWAS) to handle problems face by stock broking

houses and public listed companies.

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The dependent of Malaysian securities on Singapore exchange began to slow down

when the country separated from Malaysia in 1965, but there was still a connection

especially with the establishment of the Stock Exchange of Malaysia and Singapore (SEMS).

In 1973, the SEMS were separated to the Kuala Lumpur Stock Exchange BHD (KLSEB) and

the Stock Exchange of Singapore (SES) but the stocks were still traded together in both

exchange.

In 1973, the Kuala Lumpur Stock Exchange was established, taking over KLSEB, as

the stock exchange. Starting on January 1, 1990, the stock are no longer traded together. At

the same time, Malaysia Central Depository Sdn Bhd was introduced to operate the Central

Depository System (CDS). There were also the establishment of the Fixed Delivery

Settlement System (FDSS) and Rating Agency Malaysia (RAM) to promote clearing and

settlement system and independence credit rating for corporate debt securities respectively.

Exchange Main Board All Share (EMAS) Index was introduced in 1991. This index is

used to measure the performance of all stocks listed in the KLSE. Before this, the stock

market was represented by KLSE Composite launched in 1968. At that time, it only

comprised of 83 companies but in 1995, the figure was added to 100 stocks. Besides that,

there were also another market indicators introduced such as Industrial Index, Second

Board Index and Syariah Index. This index was launched in 1999 to satisfy the needs of the

public to invest in securities according to the Syariah Principle.

Basically, trading in the KLSE is divided into Main Market and Ace Market. The

companies to be listed in main market must have minimum paid – up capital worth of RM 60

million with a proven track record and good financial performance as well. There are 10

sectors comprising of consumer Product, Industrial Product, Construction, Trading and

Services, Finance, Hotel, Properties, Plantation and Technology.

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There are several reasons why stock index plays an important role for a particular

stock market. First, it measures the overall performance of the stock market. The index will

represent the performance of all listed securities and tells the public what is happening in the

stock market.

Second, it can be used as a benchmark to evaluate the performance of investor’s

holding of shares. The stock index is very important to investors in making their daily

investment decisions. For example, there are investors who have already set in mind on

what and when to buy or sell their shares once the index touched certain level of points. The

investors’ can also use the index to determine either the shares are according to the overall

performance of stock market or stated otherwise.

Third, it can indicate the current economic situation of a country. Since the stock

index is sensitive to the change in business activities and policies, so local investors or

foreigners can use the figure in making their decision either to invest or not to invest.

2.2 Summary

There are some relevant studies on the effect of stock splits to the stock return. But,

the regulations in announcement the stock splits different from one country to another.

All these can be tested in the present study to determine the effect of the stock splits to

the stock return. Any significant knowledge that may contribute to the body of

knowledge will be studied and help to understand more the situations involved and

proven them in the present study. Finally we can make the final conclusions based on

the evidence that get from the result tested

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CHAPTER 3

METHODOLOGY AND DATA

3.0 INTRODUCTION

This chapter focused on the data sources and methodology. The data have been taken

from various sources such as library, internet, textbooks and other.

3.1 Data Collection

Return index for each stock and KLCI Return index have been taken using daily basis,

30 days before and 30 days after the announcement. The data is collected using the data

stream.

3.3 Sampling Frame

The sample data use in the study is for six years period from 2005 through

2010. In order to avoid any distortion of the effects from the recent and current listing,

the present study imposes criteria on the sample so that it will not alter the results.

The criteria to be fulfilled by all companies included in the sample are that they must

be listed in main market.

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3.3 Sources of Data

3.3.1 Population

In this study, the population was taken from the main market and, focusing on

all sectors at Kuala Lumpur Composite Index (KLCI).

3.3.2 Sample Selection

That sample was selected from the companies at Kuala Lumpur Composite

Index (KLCI) that do stock splits. The reason this sample was selected because they

were doing stock splits during that period.

3.3.3 Sample Period

The analysis in this study focused on the companies that do stock splits in the

Kuala Lumpur Composite Index (KLCI) in 6 years period from 2005 – 2010.

3.3.4 Kuala Lumpur Composite Index (KLCI)

The return on Kuala Lumpur Composite Index (KLCI) was used as a benchmark to

market performance. The daily return index was taken from (2005 – 2010-10-12) from the

data available in Data Stream.

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3.5 Research Design

This research is designed to explore the relationship between companies return and

market return.

3.5.1 Purpose of the Study

The purpose of this study is to focuses on the applicability of the return

of that company did stock splits in all sectors at Kuala Lumpur

Composite Index (KLCI) by using buy – and – hold abnormal return.

3.5.2 Types of Investigation

This study involved the correlation types of investigation to see whether

there is positively abnormal return or negatively correlated between the

market return and companies return before and after the announcement

of stock splits.

3.5.3 Time Horizon

This study will use daily basis data from year 2005-2010.

3.7 DATA ANALYSIS AND TREATMENT

The hypothesis was tested using the skewness – adjusted t – statistics. Barber and

Lyon (1996) documented that long – horizon buy – and – hold abnormal returns are

positively skewned and that this positive skewness leads to negatively t - statistics. Their

result are consistent with early investigation by Neyman and Pearson (1982), Sophister
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(1928, 1929), which indicated that skewness has a greater effect on the distribution of the t -

statistic. That positive skewness in the distribution from the observations arise results in the

sampling distribution of t being negatively skewed. This leads to an inflated significance level

for lower – tailed tests (that is, reported P values will be smaller than they should be) and a

loss of power for upper – tailed tests (that is reported P values will be too large) when the

parent distribution of the date has positive skewness.

Abnormal returns calculated using the control firm approach or buy – and – hold

reference portfolios eliminate the new listing and rebalancing biases. Barber and Lyon

(1996) also documented that the control firm approach eliminates the skewness different

when long – run abnormal returns are calculated using buy – hold reference portfolios,

therefore Barber and Lyon (1996) advocate the use of a skewness – adjusted t – statistic.

3.7.1 Buy – and – Hold Portfolio ( BHRpt )

Return on portfolio was calculated based on the percentage difference

between ending price on t day ending price on t 0 day.

Pt − P0
BHRpt =
P0

Where: -

BHRpt = buy – and – hold portfolio return

P1 = ending price on t day

P 0 = ending price on t 0 day

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3.7.2 Buy – and – Hold Market Return ( BHRmt )

The returns on Kuala Lumpur Composite Index (KLCI) were used in

measuring the market return.

KLSE Composite Index return is used as a benchmark of the market

performance. It can be calculated using the following formula:

P1 − P0
BHRmt =
P0

Where:-

BHRmt = buy – and – hold market return

P1 = composite index on t day

P0 = composite index on t 0 day

3.7.3 Buy – and – Hold Abnormal Return (BHAR)

Abnormal return is calculated as the different between return on portfolio BHRpt

and the return on market BHRmt for a period.

BHAR = BHRpt – BHRmt

Where: -

BHAR = buy – and – hold abnormal return

BHRpt = buy – and – hold return of the portfolio

BHRmt = buy – and – hold return of the market stock (KLCI)

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3.7.4 Average Buy – and – Hold Abnormal Return

The average buy- and – hold abnormal return is the sum buy – and – hold abnormal

return (BHAR) of portfolio divided by the number of stock for a period.

BHAR
AVE .BHAR =
n

Where: -

Ave. BHAR = average buy – and – hold abnormal return.

BHAR = sum of buy – and – hold abnormal return.

n = number of stocks.

3.7.5 Standard Deviation

3.8 Hypotheses Statement

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This research is premised on the following hypotheses:

The first hypothesis is:-

H0: Buy – and – hold abnormal return of overall stock splits company is equal

to zero

BHAR = 0

H1: Buy – and – hold abnormal return of overall stock splits company is not

equal to zero

BHAR ≠ 0

3.9 Summary

This chapter focuses on the data sources and the methodology. All data have been

taken from various sources such as library, internet, textbooks, and other. Buy – and – hold

abnormal return are used in this study. The sample is list of Malaysian companies in main

market under Kuala Lumpur Composite Index (KLCI) is used to test their buy – and – hold

abnormal return with the data collected within 2005 to 2010.

CHAPTER 4

FINDINGS AND ANALYSIS

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4.0 Introduction

This chapter presents the findings of the research. It reviews the data analysis and

the result derived.

4.1 Statistical Descriptive

The first result derived from the hypothesis that is:

H0: Buy – and – hold abnormal return of overall stock splits company is equal to zero

BHAR = 0

H1: Buy – and – hold abnormal return of overall stock splits company is not equal to

zero

BHAR ≠ 0

To test whether it is significant or insignificant these studies use the 95% theoretical

levels of significance (two-tailed). Since there are 30-days before and 30-day after

stock splits observations used to test the hypothesis, the significant level is show by

the t distribution table.

Table 1: Table for all groups of companies.

Day NULL SIGNIFICANT / NOT ABNORMAL RETURN/


NO ABNORMAL
SIGNIFICANT RETURN
-28 FAIL TO REJECT NOT SIGNIFICANT NO ABNORMAL
RETURN

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NULL HYPHOTHESIS
-22 REJECT NULL SIGNIFICANT EXIST ABNORMAL
RETURN
HYPHOTHESIS
-6 FAIL TO REJECT NOT SIGNIFICANT NO ABNORMAL
RETURN
NULL HYPHOTHESIS
0 FAIL TO REJECT NOT SIGNIFICANT NO ABNORMAL
RETURN
NULL HYPHOTHESIS
2 REJECT NULL SIGNIFICANT EXIST ABNORMAL
RETURN
HYPHOTHESIS
20 REJECT NULL SIGNIFICANT EXIST ABNORMAL
RETURN
HYPHOTHESIS
30 REJECT NULL SIGNIFICANT EXIST ABNORMAL
RETURN
HYPHOTHESIS
*Significant α at 0.05

4.2 Discussion on Result

Table 1: present the results for the total sample stock splits announcements using

KLCI as market. It shows that performance of companies stock is underperform (not

significant) before the stock splits for the -28 day before announcement. But the significant

abnormal return exist from day -22 until day -6 suggest that there was anticipation of the

announcement as early as 22 days before the splits. This might have been due to either

insider trading activities or leakage of information. In the post – announcement period,

shows that no significant abnormal return for -6 until second day after the announcement.

On the second day after the announcement, it show that the performance of companies is

significant, which suggest that stock splits announcement are perceived as good news and

investor expect some extra from the announcement. In conclusion, the stock splits

announcement does not give an effect to the company’s stock return. Therefore, this study

accept the null hypothesis since most of the time the companies do not gain abnormal

return.

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CHAPTER FIVE

5.0 CONCLUSION AND RECOMMENDATION

This chapter presents the summary and conclusions for this research, and

recommendation for further research.

5.1 Conclusion

This research analyzes the return of companies doing stock splits using a buy – and

– hold abnormal return approach. This study uses long-run (one to six years)

abnormal stocks return.


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This study analyzes whether there is an effect of the stock splits announcement to

the companies’ stock return. The sample of this study consists of 40 selected

companies from 2005 until 2010.

It is observed that the abnormal return is significant 22 days before the

announcement. However the exact effect of stock split on the stock return is still

unpredictable. Six days before the announcement is not significant, so the abnormal

return does not exist. Furthermore, could not find any relation between stock split

announcement and abnormal return of the stock because abnormal return is exist

again from second day after announcement until 30 days after the announcement.

5.2 Recommendation for Further Research

There are several studies done under the applicability stock price reaction to stock

splits investment strategy either locally or overseas. Most of the investor is not

familiar with the stock splits scenario as investment strategy. Therefore other

researcher is encouraged to do this research in order to give a better outlook for this

strategy.

This study focuses on the companies doing stock splits in all sectors, main

market at Kuala Lumpur Composite Index, so it shows the performance of the stock

in all sectors. Therefore it is recommended that the study on stock split reaction

should cover specific sector companies in Kuala Lumpur Composite Index. When

there are small sample involved, the better results of the overall performance ovf

stock splits companies can be derived and recognized. Which sector is performing

well can be identified.

It is also recommended to other researcher to study for longer or shorter time

period since this study used 6 years time period. Time period can be used to

determine whether the companies doing stock splits outperform or underperform the

market.
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Furthermore, other method might be used instead of buy – and – hold

abnormal return, such as regression from the data collected. Different method used

might contribute to different result.

The research can also take the trading volume of the stock to see the pattern

whether the market liquidity has increased in the value of stock splits. From that we

can see what happens to the volume of the stock before and after doing stock splits.

It also can measure the volatility of the stock whether it is high or low in the value of

stock splits announcement. Moreover, further research can be done to measure the

risk shift and see the total risk of investment in stock of companies doing the stock

splits.

BIBLIOGRAPHY

Amihud, Y. and Mendelson, H. (1987) “Trading mechanisms and stock returns; an empirical

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