The Market Valuation of Bonus Issues in an Inflationary Environment

Cahit Adaoglu*
Faculty of Business and Economics Eastern Mediterranean University Gazimagusa, Mersin 10 Turkey

M. Ameziane Lasfer
Cass Business School City University 106 Bunhill Row London EC1 8TZ U.K.

Abstract This paper assesses the market valuation of an unusual form of free stock distributions called bonus issues which are mainly financed by the revaluations of assets equity reserve in an inflationary economic setting. We detect positive excess return on the announcement day for these bonus issues similar to the market reaction to stock dividends and splits in developed and emerging markets. In an institutional environment where cash dividend substitution effect, agency cost effect, transaction cost effect and retained earnings effect are not present, we find empirical support for the enhanced liquidity hypothesis, but interestingly, no support for the attention getting hypothesis and the signaling hypothesis which is the predominant explanation for the positive market reaction to the stock distributions in developed capital markets. We also provide a unique explanation for bonus issues as corporations need to increase their eroding paid-in capital in an inflationary environment in order to have a better debt to paid-in capital ratio for more credibility and borrowing capacity in a market of limited access to external equity financing.

JEL Classification: G35 Keywords: Bonus Issues, Stock Dividends, Stock Splits, Signaling, Liquidity, Neglected

Version: May 2008

Address for corresponding author: Dr. Cahit Adaoglu, Faculty of Business and Economics, Eastern Mediterranean University, Gazimagusa, Mersin 10, TURKEY, Tel. (+90) 392 630 2116, Fax (+90) 392 365 1017. E-mail: cahit.adaoglu@emu.edu.tr (Adaoglu); m.a.lasfer@city.ac.uk (Lasfer).

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1.

Introduction Stock distributions either by stock splits or stock dividends are puzzling corporate

behavior. Theoretically, these distributions are cosmetic operations aimed at dividing the corporate pie into more pieces with no change in the total value of the firm. However, the empirical studies report significant positive market reaction to these decisions on the announcement day.1 This positive market reaction is often related to a combination of the signaling, the liquidity and marketability, the trading range and the retained earnings hypotheses. However, this positive reaction is still controversial as stock distributions can be substitutes to cash dividends (e.g., Baker et al., 1995) and allow managers to increase their flexibility in the corporate dividend policy (Jensen, 1986; DeAngelo et al., 1992). Stock distributions, therefore, exacerbate the free cash flow problem as managers can retain more cash in the corporation avoiding the market monitoring that results from external financing. In this case, the market is expected to react negatively on the announcement date and this effect is known as the cash substitution hypothesis. In this paper, we examine the market valuation of an unusual form of stock distributions called “bonus issues”. We use the Istanbul Stock Exchange (ISE), an emerging stock market, as a testing ground where corporations distribute regularly bonus/free shares on a pro rata basis in an inflationary environment by using accumulated equity reserves, especially the revaluation of assets reserve known as “inflation revaluation equity reserves” in Turkey2. In the ISE, stock distributions are classified into bonus issues and stock dividends3, and the difference between the two is clear cut. In other prominent emerging markets such as China, India, Australia and Greece, bonus issue is the term used for “free” issues of shares from accumulated capital reserves and/or retained earnings/distributable profit. In the ISE setting, “bonus issue” term is used only for “free” shares financed from accumulated equity (capital) reserves and “stock dividend” term is used only for “free” shares

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financed from distributable profit and/or retained earnings. In the United States and in other developed countries, bonus issues are widely known as stock dividends and in the U.K., as scrip dividends. We test the signaling, liquidity and attention getting hypotheses in a closely held market structure where bonus issues are not substitutes for cash dividends as they emanate from an accounting treatment in a high inflationary environment. These bonus issues allow us to eliminate the cash dividend substitution and agency cost effects as these issues are not financed by retained earnings/distributable profit and do not change the ownership distribution (i.e., the typical existing ownership structure between the family group and the remaining shareholders is not altered). Moreover, since the transaction costs are based on the total amount of the transaction rather than on the total number of shares, the transaction costs are not changed due to the bonus issues. Retained earnings effect is not present as well since these issues are not financed by retained earnings. Specifically, the market reaction is examined for different combination of capitalization reserves such as the bonus issue capitalizations from “inflation revaluation equity reserves”, “capital gain equity reserves” and “other equity reserves”. As Rankine and Stice (1997) show, the event classification and the source of capitalization are important due to the potential effects on the announcement reaction. They show that classifications (stock splits, large and small stock dividends4) by CRSP database in the U.S. are not reliable and by correcting the classifications, they find significant differences between two-for-one stock dividend and stock split announcements. In their article, stocks dividends financed by funds other than retained earnings is called “capital surplus” stock dividends similar to the bonus issue accounting treatment in Turkey. Rankine and Stice explore the differences in market reaction for stock dividends capitilized by different equity reserves. They find that stock dividends reducing capital surplus has a lower market reaction (2.45%) relative to the market

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reaction of stock dividends reducing retained earnings (3.67%), but the difference is not statistically significant. We find that, on average, the announcement date abnormal returns are positive (2.79%) and statistically significant as a market reaction. Classified by the source of capitalization, we find statistically significant positive market reaction of 2.92%, 3.52%, 1.65% for bonus issues financed by inflation revaluation reserves only (Category 1), by combination of inflation revaluation and other equity reserves (Category 2), and by reserves including capital gain equity reserves (Category 3) respectively. We have some empirical evidence for the difference in the magnitude of market reaction to bonus issues financed by these three categories, but due to the contamination of the announcement with different combination of reserves, the empirical evidence for difference is not strong, especially for the bonus issues financed by capital gain equity reserves which provide taxation advantage for the corporation. In our regression analysis, the pre bonus issue market price and market value significantly affect the bonus issue size, and the abnormal returns are significantly related to the bonus issue size and the pre bonus issue market price. Additionally, the liquidity measures are positive and statistically significant indicating that bonus issues increase the liquidity (market depth) of the stocks traded. While these results are consistent with the enhanced liquidity hypothesis, the univariate analysis of operating margin (%) and the regression analysis of abnormal returns do not provide support for the signaling hypothesis. The insignificance of the signaling hypothesis is in line with our expectation given the ISE’s institutional settings of frequent issue of bonus issues, unstable dividend policies, low cost of sending false signals in a closely held market structure and cost neutral transaction costs. We also find no empirical evidence for the attention getting hypothesis due to the insignificant relationship between the abnormal return (market reaction) and the size of the corporation.

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The unique result of this paper is that the univariate analysis of the financing policies of corporations issuing bonus issues and the regression results of the determinants of bonus issue size indicate corporations need to increase their eroding paid-in capital in an inflationary environment in order to have a better debt to paid-in capital ratio for more credibility and borrowing capacity in order to finance their growth in a market of limited access to external equity financing. Section 2 discusses the accounting and taxation treatment of bonus issues. Section 5 reports the empirical results followed by the conclusions in Section 6. the asset revaluation reserve and the cost revaluation reserve were used as equity accounting entries in which the fixed assets were adjusted for inflation by a constant ratio announced by the Ministry of Finance periodically. namely. Till the end of 2003. “capital gain equity reserves” and “other equity reserves. namely “inflation revaluation equity reserves”.” The “inflation revaluation equity reserves” include the equity accounting entries. Section 3 reviews the literature presenting the prominent hypotheses and the testable hypotheses in the ISE institutional settings. Bonus Issues by Corporations Traded in the Istanbul Stock Exchange and Inflation Bonus issues are issued by using accumulated equity (capital) reserves known as “internal resources” in Turkey. Section 4 presents the sample data and the methodologies. different sources and combinations of capitalization reserves along with descriptive bonus issue statistics compiled from the population collected for the study. Adjusting the 4 . Taking into account the reserve characteristics. the cost revaluation reserve and the paid-in capital inflation adjustment reserve. 2. these accumulated equity reserves can be categorized under three headings. the asset revaluation reserve. The rest of the paper is structured as follows.

300% with an average and median values of 166% and 75% 5 . In 2004. for sales after the second quarter of 2006 which is not included in our sample period.book value of fixed assets for inflation allowed the corporations to fully utilize the tax shield advantage of depreciation expenses in an inflationary environment and avoid the inflation taxation. all seasoned equity issues are compiled from the ISE database ISE Companies Capital Increases and Dividend Payments 1986-2007/065.326 bonus issues by non-financial corporations traded in the ISE are collected for further analysis. the requirement of issuing bonus issues by transferring these reserves to paidin capital is abolished and only 75% of the capital gains is tax free. Corporations are allowed to transfer these equity entries to paid-in capital by issuing bonus stocks to shareholders and these bonus stocks are tax-free. The “capital gain equity reserves” include the reserves of capital gain from the sale of participation shares and capital gain from the sale of corporation property.1% to 11. a total of 1. The government motivation behind this tax-exemption was to strengthen the capital structure of the Turkish corporations. In Table 1 (Panel A). “Other reserves” include the share premium equity reserve and mandatory special equity reserve which are not related to inflation revaluation. As it is the case for bonus issues funded from other reserves. By using this official database. bonus stocks distributed to shareholders from the “capital gain equity reserves” are tax-free. However. with the implementation of international inflation accounting standards and declining trend in the inflation. these two revaluation reserves were abolished and the paid-in capital inflation adjustment reserve is introduced. The capital gain from these sales were tax-free for the corporation only if the corporation transferred these reserves to paid-in capital by issuing bonus issues to shareholders. [Insert Table 1] For the period 1986-2006. some descriptive statistics are provided for the bonus issue population. It should be noted that bonus issue ratios (% of paidin capital) range from 0.

There is a significant decrease in 2005 and 2006 due to the fact that with the implementation of inflation accounting standards.S. the average percentage followed an erratic trend except for declines in 2005 and 2006. [Insert Figure 1] In Figure 1. and due to the economic crisis in 2001 and the following considerable decline in the inflation rate as a result of the implementation of major economic reforms. The mean and median are same with a value of 40% indicating that corporations issue on average 2 bonus issues every 5 years of trading. These percentages are in contrast with the New York Stock Exchange rules that prescribe the NYSE corporations to make share distributions of less than 25% through stock dividends rather than stock splits. 33% of corporations issued bonus shares more than 2. 3.5 times in 5 years of trading indicating that stock distributions in the form of bonus issues is a frequently used corporate policy in the inflationary environment of Turkey.respectively. the relationship between the average percentage increase in paid-in capital by “internal resources” and the consumer price inflation is demonstrated. Theoretical Background and Testable Hypotheses in the ISE settings The positive market valuation of stock distributions has been well established in the U. bonus issue frequency ratio is calculated using only the nonfinancial corporations with at least five years of trading data and is calculated as the number of bonus issues divided by the number of trading years in the ISE. In Table 1 (Panel B). the average percentage increase followed the inflation trend. Between 1986 and 2000 during which the inflation rate was mostly above 50%. 2004 was the last year for distributing bonus issues from the asset revaluation and cost revaluation funds. literature with several hypotheses trying to explain this positive valuation effect which is 6 .

According to the enhanced liquidity hypothesis. 1979. Lakonishok and Vermaelen. cash substitution and retained earnings hypotheses. Arbel and Swanson. 1996. Woolridge. The positive announcement effect in several studies of stock distributions is interpreted as evidence in favor of the signaling hypotheses. the empirical evidence on the liquidity effect is mixed and inconclusive (e. The other form of enhanced liquidity is the trading range hypothesis stating that the motive behind stock distributions is to move the stock price into a normal or optimal trading range attracting more investors and hence... 1984. However. Grinblatt et al. 1987. 1981. they increase the liquidity and marketability.. in the presence of asymmetric information. McNichols and Dravid. McNichols and Dravid.. 1993).. Rankine and Stice. neglected firm (attention-getting).. 1990. corporations issue stocks to signal good news or optimistic expectations to investors (e. Ikenberry et al. Nichols. Copeland.. 1996). trading range. 1997) and managers are likely to signal that they will have larger increases in future earnings in order to at least maintain or increase their cash dividends and earnings per share. increasing liquidity. Peterson et al. 1986..predominately explained by the signaling hypothesis. Murray. and result in a decrease in the bidask spread. 1983. 1990. Conroy et al. The neglected firm or the attention getting hypothesis states that managers who believe that the stock is currently undervalued use the stock distribution as a tool for attracting attention from analysts resulting in the revaluation of their future cash flows (Grinblatt et al. 7 . the positive abnormal returns are related to the possibility that since stock distributions increase the number of shares in circulation.g. The other not mutually exclusive explanations are the liquidity. The signaling hypothesis states that. 1985.g. 1984. 1990. 1987. Lamouoreux and Poon. 1993. Banker et al. Lakonishok and Lev.

1997. However. the cash substitution hypothesis states that managers can keep the cash in the corporation and at same time. the retained earnings and the agency cost hypotheses. Hypothesis 1: Corporations are expected to have positive market reaction to the bonus issue announcements. Moreover. The hypothesis states that stock dividends incorporate stronger signals as they decrease the pool of distributable funds signaling that managers believe in strong future cash flows in order to have a stable dividend policy (Rankine and Stice. namely stock dividends and stock splits. Banker et al. Consistent with the hypotheses above and taking into the ISE institutional settings. they are unlikely to time their bonus issue distributions weakening the signaling effect. Another recent dividend policy related hypothesis is the retained earnings hypothesis which tries to explain the different magnitude of positive market reaction to the two forms of “free” stock distributions.’s (1993) study find negative market reaction for announcements of cash dividend omissions especially for corporations with no prior “free” stock distribution history.. their decision cannot be related to the cash substitution. 2005. Crawford et al. namely the signaling. satisfy the shareholders by distributing “free” shares. since bonus/free shares are distributed frequently on a pro rata basis by using accumulated equity reserves. especially the revaluation of assets reserve.In relation to the dividend policy. The interesting observation regarding the bonus issue distributions in the ISE is the significantly high magnitude and frequency of these distributions. Since companies in the ISE distribute bonus issues frequently. Bechmann and Raaballe. especially in the case of stock dividends. 2007). another weakening effect on the signaling effect is 8 . In the Istanbul Stock Exchange. This institutional setting allows us to focus on three hypotheses. the neglected firm and the liquidity hypotheses. the predicted market reaction is negative as opposed to positive market reaction prediction of the preceding hypotheses.

where it is based on the number of shares traded.S. Another factor weakening the signaling effect is the low cost of sending false signals. Bildik and Gulay. Based on the observations of low diffusion of ownership and an average public openness (free float) of 24% in the ISE. the transaction costs incurred by investors are not altered by bonus issues and the administrative cost of the frequent bonus issues is low7.S. The lack of long-term institutional investors in the ISE makes the market very volatile which is a typical characteristic of all emerging markets. Consequently. For example. unlike the stable and sticky dividend policy behavior in developed capital markets. increase the number of shares in circulation resulting in enhanced liquidity and marketability. Additionally.g.. For a signaling device to be valid. Consequently. the closely held ownership structure. Ozden (1996) reports that short-term capital appreciation is the paramount investment concern of investors in the ISE while the dividend income is clearly at the bottom of their concern list. The ISE investors are typically short-term investors (e. empirical evidence on signaling effect. 2007). corporations trading in the ISE follow unstable dividend policies. the market reaction to bonus issues based on the signaling effect in the ISE is expected to be none or lower than the U. especially family controlled corporations. there should be a cost associated with sending a false signal such as the case for stock splits resulting in administrative costs and the increased transaction costs for investors. Additionally. bringing the stock price into an optimal trading range can be 9 . especially bonus issue distributions. The market reaction to stock distributions in the ISE is likely to reflect enhanced liquidity rather than signaling. Adaoglu (2000) shows that. diminishes the need to use the bonus issues as a signaling device. financial practitioners in Turkey argue that equity issues are welcomed by investors since new equity issues.that corporations trading in the ISE follow unstable dividend policies6. The brokerage commission in the ISE is based on the total market value of the transaction unlike the case in the U.

Wulff. It is expected that the announcement effect will be positive reflecting the positive effects of enhanced liquidity and marketability. Germany. Unlike the market oriented countries such as the U.S. Denmark and Switzerland (Booth et al.. bonus issues can also be used as a tool to attract the analysts’ attention. 2007. 2001. Bechmann and Raabelle. Even though the proportional increase in the paid-in capital favors the debtholders at the expense of shareholders due to greater security. Within the framework of attention getting. For 10 .e. weak shareholder rights and high creditor rights. unavailable corporate bond market and closely held ownership structure8. typically family members controlling the management and voting power both in the board of directors and shareholder meetings.. Kunz and Rosa-Majhensek. They conclude that different institutional factors can result in different capital structures as well as different corporate governance systems. known as legal capital in the U.S.another motivation for bonus issues especially taking into account the fact that there has been a significant growth in the ISE index during the study period. but not the information signaling proxy for better future earnings. the amount of paid-in capital has more legal as well as corporate policy implications in the bank oriented countries such as Turkey. 2002. and the U. 2007). heavy dependency on short-term bank financing for growth. and generally defined as the total par values of outstanding shares) has more legal protection than the other equity items that can be abused by the controlling shareholders. Hypothesis 2: The liquidity and the neglected firm effect proxies are expected to be associated with the market reaction. with institutional settings of high inflation. Booth et al. shareholders in the ISE welcome the paid-in capital increases due to positive effects on borrowing capacity for growth as well as due to the fact that paid-in capital (i.K. in Turkey. and attention getting hypotheses. (2001) show that there is a country effect on the determinants of capital structure focusing on the capital structures in several developing countries including Turkey.

11 . Gonenc states that it is very difficult to find external equity and corporations need bank financing to support their growth. In the announcements. In these economic conditions. the sale of property and/or participation shares can also indicate cash squeeze problem for the corporations. in order to avoid the corporation tax. Bechmann and Raaballe (2007) state that even though share capital increases through stock dividends improve security for creditors. board of directors typically state that the paid-in capital will increase due to the bonus issue distribution. Consequently. As stated in Section 2.instance. Even though there is a tax advantage for the corporation. Gonenc shows empirically that there is a positive relationship between the growth opportunities and the debt ratio due to the institutional characteristics of Turkish corporations and economy. Hypothesis 3: In an inflationary environment. both negative and positive effects are present affecting the expected magnitude of the market reaction. the increase in paid-in capital is expected to be associated with the market reaction as well as with the bonus distribution ratio. Interestingly. Similarly.602). Gonenc (2003) shows that due to high inflation. in Denmark. political and economic uncertainty in Turkey. dividends can not be paid out of legal capital and it is very difficult to decrease the legal capital due to stringent legal protections. the VAT and stamp duties. financial structure of Turkish industrial corporations in the ISE are heavily dependent on short-term debt with an average 12% long-term debt to total debt ratio for the period 1990-19999. “…this appears to be a necessary step for these firms in order to finance steady growth by debt (at an unchanged debt to equity ratio) and retained earnings alone” (p. corporations were required to transfer any capital gain from property sale and/or sale of participation shares to paid-in capital through bonus issues. unlike the relationship found in developed and some developing countries.

4. banks.3. 69% in Greece. the sources of capitalizations are announced by the Board of Directors.2© software. 30% in China. As shown in Panel C.Hypothesis 4: Bonus issue announcements that include the bonus issues financed from “capital gain equity reserves” are expected to have different market reaction relative to the bonus issue announcements that include the “inflation revaluation equity” and/or “other equity” reserves.0© software. 12 .1. [Insert Table 2] Table 2 presents the descriptive statistics for the bonus issue announcements sample as well as the sources of capitalizations. Papaioannou et al. the average (median) bonus issue ratio measured as a percentage of paid-in capital12 in the ISE are 221% (100%) which is substantially higher than other markets such as 100% in India. they account for 81% of the total. “capital gain equity reserves” are used mainly due to the corporation tax advantage.2. In 30 out of 155 (30%) bonus issue announcements. but they account only for 5% of the total amount of bonus issues in YTL.5© and Rasyonet Hisse XL v. 18% in Australia.1. Data and Methodology We identify 161 uncontaminated bonus issue distribution news10 that are announced by non-financial corporations (i. The adjusted/unadjusted stock prices and trading volume data are obtained from the electronic databases Tekaredi-Veri v.e. As it can be seen in Panel A and Panel B. insurance. holding. Balachandran et al.. 110 of 155 (70%) bonus issues includes the “inflation revaluation equity reserves” and in terms of total amount in New Turkish Lira (YTL). finance and investment companies) in the official ISE daily bulletin over the period 1995-200611 by searching through the electronic news database in the Finnet Haber Analiz 4.. excluding utilities. 2002.. In 155 out of 161 bonus issue announcements. 2000. 11% in US and 9% in Japan (Lukose and Rao.

(Lakonishok and Lev. bonus issues are different in terms of accounting treatment relative to stock splits. it is the only index whose data is available for the period of analysis. Moreover. The non-parametric generalized sign test is also used as a robustness check in order to avoid the dependence on normality of return distributions. but still at a significantly higher magnitude relative to 85% average stock split distribution in the U. 4. The cumulative market reaction (CAR) for each sub-event period is also calculated and is tested for statistical significance. Panel C shows that 85% of bonus issue distributions are between 1% and 300%. The return on the market portfolio is proxied by the value-weighted ISE 100 index which includes 100 corporations based on their market value and liquidity characteristics.2004. Lakanishok and Lev. The event window is taken as -5 to +5 relative to the announcement day during which there are no other corporation specific news other than the bonus issue announcement. the announcement day (event) period (0 to +1) and the post-event period (+2 to +5). However. 2002). as stated before.1 Market reaction We adopt the traditional event study approach to assess the market reaction to bonus issue announcements by using the market adjusted model13 using the estimation period -140 to -2114 relative to the event day 0. In terms of distribution ratio. Kato and Tsay.2 Liquidity 13 . 4. the bonus issue distributions in the ISE are more similar to the stock split factors. 1987. 1987). The ISE 100 index is a representative index and is the most widely used index by the investment banking industry as well as by the financial researchers as a proxy for the market return.S. Three announcement sub-event periods are also defined as the pre-event period (-5 to -1).

Similarly. In the ISE. We could not use the number of days of trading yardstick since all stocks in our sample do not have any missing trading data. stock’s trading volume is an increasing function of its liquidity. (1997) for the case of the Tel Aviv Stock Exchange. We do not use the volume turnover since on average. the change in relative trading volume for security i is measured as the difference between ln(relVOLi. 1986). We follow Amihud et al. since there are no market makers or specialists who post bid and ask prices.after) and ln(VOLi. we adopted the following yardsticks for testing the enhanced liquidity effect. Therefore. the three most commonly used measures of trading activity are the volume (daily number of shares traded). namely the stock’s raw and relative trading volume. Alternatively.after and VOLi. The change in raw trading volume for security i is measured as the difference between ln(VOLi. the free float percentage of outstanding shares is around 25% in the ISE and there is a lack of percentage free float data for specific periods15. an increase (decrease) in the trading volume shows an increase (decrease) in liquidity.before) where VOLi.before are the average daily trading volume in lots before the announcement day and after the ex-day. it is the investors providing liquidity to the market by entering their limit orders into the electronic trading system. the volume turnover (daily number of shares traded divided by shares outstanding) and the number of days with trades. (1997) and use three different measures of liquidity. and the stock’s market depth ratio. Theoretically. liquidity of stocks cannot be measured by bid-ask spreads in the ISE.before) where 14 . Investors act as market makers and do not have to hold stock inventories in the ISE’s price competitive and order-matching trading system (multiple price continuous auction system). The average trading volumes are calculated for the period (-140 to -21) before the announcement day and for the period (+21 to +140) after the ex-day16.after) and ln(relVOLi. In line with arguments of Amihud et al.In the literature of stock distributions. ceteris paribus (Amihud and Mendelson.

1993. 4.t (1) where Vi. 101-153) sorted by the pre-bonus issue average raw and relative trading volume. Muscarella and Piwowar.t| are the trading volume in lots and the absolute return respectively for stock i on day t. a high ratio indicates that investors can trade a large number of shares with little price change.m m m MD i = ∑V i . comparing the MD for the period (-140 to -21) before the announcement day to the MD for the period (+21 to +140) after the ex-day. Berkman and Elaswarapu.. Taking into account the finding by Wulff (2002) for the German stock splits that less liquid shares have a relatively larger improvement in liquidity and a stock split does not improve liquidity if the stock’s liquidity is already high.t and |Ri.before are the average daily relative trading volume in lots. The ratio is measured as: k .after) and ln(MDi. Khan and Baker. The third measure is the market depth ratio which is considered as a good proxy for liquidity in several microstructure studies (e. the sample is portioned into three groups (1-50. The change in the market depth ratio for security i is measured as the difference between ln(MDi. and market depth. In other words. The daily relative trading volume in lots is calculated by dividing the unadjusted trading volume by market volume for each day.3 Univariate analysis: Operating performance and financing 15 .relVOLi. Therefore.g.t k ∑R k i . 2001).after and relVOLi. 51-100.before). The statistical significance of mean and median changes for all and sorted groups is tested by using the parametric paired t-test and the non-parametric Wilcoxon test respectively. 1998. an increase (decrease) in the market depth ratio shows an increase (decrease) in liquidity or market depth for a stock. The market depth ratio measures the trading volume associated with a unit change in the stock price.

t to (t+1) and (t-1) to (t+1) where t is the event year. Taking into account the ISE institutional settings. We test the hypothesis that if companies issue bonus shares to signal good future performance. Using parametric ttest and non-parametric Mann-Whitney U-test. we test for differences in mean/median for (t1) to t.We use the operating margin (%)17 as a proxy for the signaling hypothesis in an univariate analysis framework. 4. total debt growth rate (%). debt to paid-in capital ratio (%). We try to provide evidence whether there is a need for an increase in the paid-in capital in order to finance growth by borrowing. especially focusing on the enhanced liquidity effect and the debt to paid-in capital ratio effect. we regress the bonus distribution ratio on the following explanatory variables: BDRi = α0 + α1Pi + α2MVi + α3DCPi + εi (2) 16 . Similar to the operating margin’s time period analysis. short-term debt to total debt ratio (%) and short-term debt growth rate (%). we would expect an increase in operating margin in the postevent period. we analyze the financial structures of our sample corporations by using several financial ratios such as debt to equity ratio (%).4 Multivariate analysis: Bonus distribution ratio and market reaction Following the model adopted in McNichols and Dravid (1990) study. Taking into account the heavy dependency on short-term borrowing by the ISE industrial corporations and the eroding paid-in capital in an inflationary environment. the event year and the post-event year. we use the regression analysis to capture the factors that determine the bonus issue distribution ratio. we calculate these ratios for the pre-event year. We use only one year operating margin in the pre-event and post-event periods in order to avoid the previous and subsequent bonus issues by the same corporation.

We approximate the liquidity explanation for bonus issue distribution by using the unadjusted stock price (P).i + α5DBONi + α6DCGRi + εi (3) where the definitions of BDR. MV is the natural log of market value of equity in US$ at the end of quarter before the bonus issue announcement. McNichols and Dravid state that larger corporations prefer to maintain a higher stock price (i.e. Small corporations tend to be analyzed less extensively 17 ..i = α0 + α1BDRi + α2MVi + α1Pi + α4CAR(-21.. The DBON is a dummy variable having a value of 1 if the corporation does not have a bonus issue in the previous year and captures the surprise effect. DCP is the debt to paid-in capital ratio at the end of quarter before the bonus issue announcement.+1). CAR(-21. The DCGR dummy variable tries to capture whether there is difference in market reaction for announcements that include the “capital gain reserves” in addition to other equity reserves.-140) is the cumulative abnormal return for the period -21 to -140 relative the announcement day 0. We expect a positive relationship between BDR and CAR as greater bonus issue distribution sends a more favorable signal to investors with more free float shares in circulation (i. higher liquidity). We also regress the level of market reaction (CAR(0. The relationship between the BDR and P is expected to be positive based on the reasoning that higher stock prices need a higher BDR to bring it down to a more attractive level.-140). a higher targeted stock price range) indicating a negative relationship between the BDR and MV. DCGR is a dummy variable having a value of 1 if the bonus issue announcement includes “capital gain reserves” as one of the sources of the capitalization. P is the natural log of unadjusted stock price at the end of quarter before the bonus issue announcement. The relationship between the BDR and DCP is expected to be positive as a higher bonus distribution is needed to bring down the DCP ratio to a reasonable level.e.where BDR is the bonus distribution ratio. MV and P are as stated above. +1)) as the dependent variable on the following explanatory variables based on the model adopted in Rankine and Stice (1997): CAR(0.

. The cumulative abnormal return for both pre-event (-1. 2008). 5.-140)) since if a bonus distribution is a costly signal. The mean abnormal returns on event days 0 and +1 are 1.00% respectively with statistical significant t-values and generalized sign tests. 1997). the percentage of positive mean abnormal returns along with the t-value and the generalized sign test result for each event day are presented. The cumulative abnormal return for on-event period (0.79% and 1. as a proxy for signaling hypothesis. we use the pre bonus distribution run up (CAR(-21.e. Empirical findings In Table 3.. Hence. the cumulative abnormal returns for the selected periods. we include the natural logarithm of market value of equity (MV) and expect a negative coefficient indicating a greater market reaction for relatively smaller corporations (i. managers would announce a bonus issue distribution if they believe that the run-up reflects fundamental value and there is a momentum of prices into the future (Leledakis et al. -5) and post-event (+2. attention-getting hypothesis/neglected firm hypothesis). +5) are statistically insignificant supporting the permanency of the announcement effect and supporting the correct detection of the announcement day as well as the robustness of the methods used in measuring the market reaction. the daily mean abnormal returns.79% with statistical significance (Hypothesis 1). Lastly.and less information is available for these corporations. [Insert Table 3 and Figure 2] 18 . corporations with a higher stock price (P) are more anticipated by the market to declare a bonus issue distribution indicating a negative relationship between the market reaction and the stock price (Rankine and Stice. +1) is 2. Since stock distributions can be used as a tool of returning the stock price to an optimal trading range.

Korea and Switzerland (see endnote 1). Canada. [Insert Table 4] Table 4 (Panel A) shows the on-event (0. Denmark.00%. Hong Kong.31%) and 3.Figure 2 shows the mean abnormal return and cumulative abnormal return movements over the event period.S. Moreover. the bonus issues are financed with a combination several sources of equity reserves.65% and the median is 0. The mean (median) cumulative abnormal returns for “inflation revaluation reserves only” announcements and combination of “inflation revaluation reserves and other equity reserves” are 2. Greece. Typically. there is a major up swing on days 0 and +1 leveling off to a permanent trend between 3.52% (2. For announcements that include the capital gain equity reserves in addition to all other equity reserves.45% for the 100% stock dividends reducing capital surplus in Rankine and Stice (1997) study.92% (2. U. Japan. Germany. We could not find any uncontaminated announcements that only include the capital gain equity reserves so that 19 . we find relatively strong statistically significant market reaction for announcements that do not include the capital gain equity reserves.21%) respectively.K. +1) cumulative abnormal returns for three subsamples categorized by the sources of capitalization and shows test results for testing the differences in means/medians for these three subsamples. The positive market reaction is in line with the market reaction of “free” stock distributions in developed and emerging markets such as U.50% and 4. India. In shown in Panel A... Australia. China. The trends can also be observed for mean abnormal returns with positive values on days 0 and 1 along with erratic movements during the pre-event and post-event periods.02% indicating there is a distributional problem in this type of announcements. the non-parametric generalized sign test is statistically insignificant. For the cumulative abnormal return. the positive market reaction is in line with the announcement reaction of 2. the mean cumulative abnormal return is 1. Specifically.

In Panel A. we detect no statistically significant difference in mean/median of “inflation revaluation equity reserves only” and combination of “inflation revaluation equity reserves and other equity reserves. we detect a statistically significant difference in the median when the rest of all announcements is compared with the announcements that include the capital gain equity reserves. trimmed mean and median differences are all positive with statistical significance. the first (1-50). and the second (51-100) sorted groups. the three measures of liquidity. For all. the difference results are positive but statistically insignificant. namely raw trading volume. Overall.” However. the trimmed mean and median of the difference between ln(Volafter) and ln(Volbefore) are shown for all and sorted groups.we can isolate the effect. For the first sorted group (1-50). trimmed mean and median with statistical significance. the last sorted group (101-153) results indicate that a bonus issue does not improve liquidity if the stock’s liquidity is already high. The last sorted group (101-153) has a negative change in mean. the results are statistically significant and positive with the highest liquidity improvement for the first sorted group with the relatively less pre-bonus issue liquidity. These results support the Wulff’s (2002) finding for the 20 . The results in Panel B are stronger for the relative trading volume taking into account the effect of market volume changes. are shown. For all. the mean. The last sorted group does not have a statistically significant change in the liquidity. The ANOVA F-statistic and Kruskal-Wallis tests could not detect statistically significant difference in mean/medians of the three categories of capitalization. relative trading volume and the market depth ratio. In Table 4 (Panel B). the mean. [Insert Table 5] In Table 5. The results show that less liquid shares (1-50) have a relatively larger improvement in liquidity followed by statistically insignificant positive change for the second sorted group (51-100) and statistically significant negative change for the last sorted group (101-153) having the pre-announcement largest liquidity.

Similarly. we look at several ratios before the event. during the event and after the event. In Table 6. there is a statistically significant decline in the mean and median debt to paid-in capital ratio between (t-1) and (t). for the market depth ratio in Panel C. In regards to the maturity of debt (Short-term Debt/Total Debt). Similarly. there is a statistically significant positive change in the market depth ratio for all bonus issues driven by the first sorted group (1-50) which has less liquidity and is more sensitive to changes in the number of shares available in the market. short-term debt growth rates show that short-term debt grows in both pre and bonus issue years with a statistically significant decline in growth during the post bonus issue year. With respect to total growth in debt. results show that in the pre bonus issue and bonus issue years. All three measures are consistent with the enhanced liquidity effect showing that bonus issue distributions increase the liquidity (market depth) of the stocks traded in the ISE (Hypothesis 2). due to the transfer of equity reserves to paid-in capital. t to (t+1) and (t-1) to (t+1) where t is the event year.German stock splits that the less liquid shares have the relatively larger improvement of liquidity and might reconcile the mixed evidence on liquidity in the US empirical studies. we could not detect a statistically significant change in the operating margin for periods (t-1) to t. [Insert Table 6] In Table 6. consistent with Gonenc (2003) findings. This result supports the no signaling effect of the bonus issue distribution announcements due to the institutional settings in Turkey (Hypothesis 2). All preceding ratios indicate that there is an increase in the level of debt in both pre 21 . there is an increase in the level of debt with a statistically significant decline in post bonus issue year. and then the ratio increases at (t+1) but not to the pre bonus issue level at (t-1). results show that around 75% of total debt is short term borrowing with a slight decline in the post bonus issue year. Focusing on the financing structures of our sample corporations.

[Insert Table 7] In Table 7.37%. The intercept and all coefficients are statistically significant with an adjusted R2 of 40. the coefficient of debt to paid-in capital ratio has the predicted sign supporting the hypothesis that corporations with a higher debt to paid-in capital ratio declare a higher bonus distribution ratio to bring down the ratio for more credibility and borrowing capacity (Hypothesis 3).-140) coefficient has the wrong sign and is statistically insignificant. The coefficients of pre bonus issue market price and the market value have the predicted sign supporting the enhanced liquidity hypothesis (Hypothesis 2). we detect no statistically significant change in the debt to equity ratio as shown in Table 6 indicating growth in equity possibly through inflation revaluation reserves. [Insert Table 8] The regression results for the cumulative abnormal return and the five explanatory variables are presented in regression 1 of Table 8. The CAR(-21. the statistically significant BDR and P coefficients support the enhanced liquidity hypothesis. The coefficients of the market value (MV) and bonus dummy (DBON) have the correct sign but are statistically insignificant. Overall. the coefficients of bonus distribution ratio (BDR) and the pre bonus market price are positive and negative respectively with statistical significance. Additionally. Managers set their bonus distribution ratio to return the stock price to an optimal range and the optimal range is set higher for larger corporations. As predicted. Additionally. the regression results on the bonus distribution ratio choice (model 2) are presented and the results are in line with the findings of McNichols and Dravid (1990).bonus issue and bonus issue years indicating a need for an increase in paid-in capital as a stronger covenant for creditors in order to finance growth through borrowing (Hypothesis 3). We could not find empirical support for the attention-getting/neglected firm hypothesis with a statistically insignificant 22 .

the change in relative trading volume. the dummy variable DCGR is added to regression 1 and the results are presented in regression 2 of Table 8. enhanced liquidity and neglected firm hypotheses as well as for the importance of the amount of paid-in capital in an inflationary environment. transaction effects and retained earnings hypotheses are not prevalent and bonus issues are capitalized in the paid-in capital amount mainly from equity reserves which are created due to the revaluation of assets in an inflationary environment. the abnormal returns are positive and significant on the announcement day. we use three liquidity measures. The coefficient is statistically insignificant indicating no effect (Hypothesis 4). and the change in the market depth ratio in order to test 23 . We find that. 6. we should mention that the statistically insignificance of this coefficient can be due to the fact that the event is contaminated with the effects of other capitalization sources such as the inflation revaluation reserves. The statistically insignificant CAR(-21. We try to provide empirical evidence by relating the bonus distribution ratio as well as the market reaction abnormal returns to the corporation’s stock liquidity. on average. agency cost.-140) coefficient supports the expectation of no signaling effect for better future earnings due to the unique institutional settings of the ISE (Hypothesis 2). In addition to regression results. the change in the stock’s trading volume. To control for the effect of having “capital gain reserves” as one of the capitalization sources. However.MV coefficient (Hypothesis 2). to the neglected firm effect and to the signaling of future prospects hypotheses. We provide empirical evidence for the signaling. Conclusions We examine the market reaction to bonus issue announcements in a market setting where the cash dividend substitution.

increase the liquidity and marketability of the stocks. and in other developed capital markets. In the ISE settings. namely the raw trading volume. Additionally. bonus issues are associated with an increase in liquidity and this empirical finding contributes to the liquidity effect studies of stock distributions which have had mixed results in the U. are significantly positive indicating that bonus issue distributions increase the liquidity (market depth) of the stocks traded in the ISE. 24 . We also find that if the stock’s liquidity is already high. especially in a market where the stock market index has continually increased significantly during the period of analysis. Additionally. the bonus issue distribution does not change the liquidity.S. the relative trading volume and the market depth ratio. the positive announcement effect provides evidence for the enhanced liquidity expectation. In the absence of agency cost. and hence.S.. The magnitude of market reaction is also explained by the pre bonus isse price level as well as the size of bonus distribution ratio.the enhanced liquidity hypothesis which states that stock distributions increase the number of shares in circulation in a closely held market structure. Especially. The result of no change in liquidity for stocks which are already highly liquid might reconcile the mixed liquidity evidence of stock distributions in the U. transaction cost and retained earnings effects. the improvement in liquidity is stronger for distributions with relatively less liquid stocks. the motivation can also be to return the stock price to a normal trading range. bonus distribution ratio is related to the size of corporation as well as to the pre bonus issue price level. Our univariate analysis of operating margin around the event year and the statistically insignificant relationship between the market reaction abnormal returns and the pre bonus issue stock price run up do not provide support for the signaling hypothesis which is expected to less relevant given the ISE’s institutional settings where bonus issues are frequent and emanate from an accounting treatment in an inflationary environment. cash substitution. In a regression analysis framework. The three liquidity measures.

Leledakis et al.. In the announcements of bonus issues by the Board of Directors. 2008). the insignificant relationship between the market value of the corporation and the magnitude of market reaction does not provide empirical evidence for the neglected firm hypothesis. we also test for differences in market reaction for bonus issues capitalized from different sources of equity reserves. the empirical evidence is not strong due to the fact the announcements are contaminated with other sources of reserves and we could not isolate the effect for the “capital gain equity reserves. Within the institutional settings of high inflation. This result is consistent with the irrelevancy of signaling hypothesis for better future performance in markets with similar institutional settings such as Germany and Greece (Wulff.S. the increase in paid-in capital is welcomed by the ISE investors with a positive 25 . closely held market structure. 2002. Additionally.. unavailable corporate bond market. Different from many of traditional studies in stock distributions. We detect some empirical evidence for difference in the magnitude of market reaction. the increase in paid-in capital as a result of the bonus issue is stressed.. weak shareholder and high creditor rights.corporations follow instable dividend policies in addition to the low cost of sending false signals and neutral transaction cost effect. 2002. the amount of paid-in capital has more legal and corporate policy implications especially in countries where the continental European law system is adopted such as Turkey. Unlike the institutional settings in the U. especially for announcements that include “capital gain equity reserves” which provide some tax advantages for the corporation.” The unique finding of the study is that the motivation of issuing bonus issues in a market environment of limited access to external equity capital and high inflation is to increase the amount of eroding paid-in capital for more credibility and borrowing capacity for growth. However. Denmark and Switzerland. Papaioannou et al.

26 .market reaction. Empirically. we find a statistically strong positive relationship between the size of the bonus distribution ratio and the debt to paid-in capital ratio.

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50% 0. Average Paid-in Capital Increases by Bonus Issues between January 1986 and December 2006 Return (%) 4.00% 1.00% 0.50% 4.00% Day -5 -4 -3 -2 -1 0 1 2 3 4 5 AR CAR Figure 2.00% 3. Consumer Price Inflation.50% 1.120% 400% 350% 100% 300% 80% 250% 60% 200% 150% 40% 100% 20% 50% 0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0% Consumer price inflation (%) Average % increase in paid-in capital by internal resources Figure 1. Bonus Distribution Ratio Consumer Price Inflation .00% 2.00% -0.50% -1. Market Reaction around Announcement Day 0 30 Avg.50% 3.50% 2.

300 Median Maximum Panel B.Table 1. of Trading (N:224) Bonus Issue Number of Frequency Ratio Corporations % of Bonus Issue Distributions (Rounded to the nearest %) 4 2% 0% 10 4% 10% 32 14% 20% 59 26% 30% 47 21% 40% 37 17% 50% 15 7% 60% 10 4% 70% 8 4% 80% 2 1% 90% Average 40% Median 40% 31 . It should be noted that the bonus issue ratio is also equivalent to the percentage increase in the number of shares outstanding. Bonus Issue Frequency Ratio for Corps. By Year and 1986-2006 Overall Number of Distributions Average Bonus Issue Ratio Realized (%) 22 64 22 67 28 69 38 82 50 89 60 107 59 95 63 66 93 112 96 154 96 141 90 127 84 166 90 243 82 345 79 155 73 319 69 171 68 271 33 227 31 114 1986-2006 Bonus Issue Ratio (%) 166 0. The Bonus Issue Frequency Ratio is calculated using corporations with at least five years of trading and is calculated as the number of bonus issues divided by the number of transaction years in the ISE. Descriptive Statistics for the Bonus Issues by Non-financial Corporations This table reports selected descriptive statistics for 1. Bonus issue ratio is the amount of bonus issues in New Turkish Lira (YTL) distributed as a percentage of paid-in capital. Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Panel A.1 Average Minimum 75 11. with at least 5 Yrs.326 bonus issue distributions by non-financial corporations traded in the Istanbul Stock Exchange over the time period 1986 to 2006.

808.000 (%) Number of 74 44 18 10 4 3 4 Bonus issues % of Total 46% 27% 11% 6% 2% 2% 2% (N:161) Average 277% Median 125% 1.014 In YTL 81% 14% 5% % of Total Panel C.885 113.0012.000 1 1% >2.000 3 2% 32 .828. “Inflation Revaluation Equity “Capital Gain Bonus Issue Revaluation Reserves” and Equity Delivery Equity “Other Equity Reserves” and Year Reserves” Only Reserves” all others Total 4 2 2 8 1995 3 2 5 1996 4 3 2 5 1997 4 4 7 15 1998 5 7 10 22 1999 7 4 1 12 2000 13 5 3 21 2001 5 6 5 16 2002 14 4 5 23 2003 6 5 5 16 2004 3 1 4 2005 1 1 1 3 2006 Count 69 (44%) 41 (26%) 45 (30%) 155 (100%) Panel B. In 155 out of 161 bonus issue announcements. Panel A. “Inflation Revaluation Equity Reserves” include the revaluation fund reserve. the sources of capitalization are declared by the Board of Directors. “Other Equity Reserves” include equity reserves such as share premium reserves and special reserves. cost revaluation reserve and paid-in capital inflation adjustment reserve. Number of bonus issues sorted by capitalization source Capitalization of Combination of “Inf.2201 312. Descriptive Statistics for the Bonus Issue Sample This table shows the details of bonus issues and sources of the capitalization for the period between January 1995 and December 2006.490. Sources of capitalization in New Turkish Lira (YTL) and % of total Inflation Other Equity Capital Gain Equity Revaluation Equity Reserves Reserves Reserves 1.878.Table 2. Distribution of bonus issue ratio (%) Bonus 1101201301401501701issue Ratio 100 200 300 400 500 700 1. “Capital Gain Equity Reserves” include the reserves of capital gain from the sale of participation shares and capital gain from the sale of property.

15 -0.0025 39% -0. Cumulative abnormal returns Period CAR t-value 0.77 0. Sign.17* -0. *significant at 1%.02 Pre-event (-1.0008 45% -0. and the post-event period is defined as days +2 to +5.0279 6.32** 0.19 -1.0035 45% -1.29 1. the percentage of positive AR.0179 59% 5.0028 47% 0.27** -0.52* -0.04 0.45 -0.0072 1.45 -0.13 0. Test 1.0004 44% -0.07* 2.26* On Event (0. Daily abnormal returns ARt %>0 t-value -0.25 0.0001 43% -0.15 4. The pre-event period is defined as days -5 to -1.0100 55% 3.76 Post-event (2.45 -0.92 33 .0073 53% 2. 5) Gen.0045 51% 1.26 -0.12 0. **significant at 5%.Table 3.80 0.63 1. Sign.61 3.69* 0.0045 47% 1. -5) 0.0048 0. Test -0. the on-event period is defined as days 0 and 1.92 Gen. and the parametric t-statistic values and the non-parametric generalized sign test values. Market Reaction to Bonus Issue Announcements This table shows the daily mean abnormal returns (ARt) for the event window (-5 to + 5 around the announcement day 0) and the cumulative abnormal return (CAR) for relevant periods.19 Panel B. 1) 0. Period Pre-event On Event Post-event Dayt -5 -4 -3 -2 -1 0 1 2 3 4 5 Panel A. The sample size is 157 (4 outliers with bonus issue ratio greater than 1000% are omitted).

0231) Combination of Inf. Test Capitalization Source CAR (0. Rev. Reserves and/or Other Equity Reserves) (N: 43) 0. Comparison of Bonus Issue Announcement Market Reactions: Event Window CAR (0.0002) 2.0292 Inflation Revaluation Reserves Only (N: 69) 3. Rev.02 ANOVA F-statistic KruskalWallis 0. Rev. 1) This table presents the cumulative abnormal returns categorized by the source of capitalization and show test results for differences in means and medians. Rev.10 1. Reserves and Other Equity Reserves (N: 40)” “(Inflation Revaluation Reserves Only + Combination of Inf. Panel A.0221) Capital Gain Equity Reserves and (Inf.59* 4. Sign.21 Panel B.17 34 . Reserves and Other Equity 0. Equality tests for different sources of capitalization Capitalization “Inflation Revaluation Equity Reserves Only (N: 69)” versus “Combination of Inf. Similarly. Parametric Anova F-statistic and nonparametric Kruskal-Wallis results are presented for testing the difference in mean/median among the three sources of capitalization.82* Reserves (N: 40) (0. Reserves and Other Equity Reserves (N: 109)” versus “Capital Gain Equity Reserves and (Inf.51* (0. ***significant at 10%.Table 4. Rev. 1) 0. Reserves and/or Other Equity Reserves) (N: 43)” t-test 0.19** 1.20* 3. Comparison of all three sources of capitalization and equality tests Event Window t-value Gen.61*** 1.0165 (0. Numbers in parentheses denote medians.0352 4.68 2.39 MW test 0.**significant at 5%. t-test and Mann-Whitney U-test results are presented for testing the difference in mean/median between the two sources of capitalization. *significant at 1%.

635. Panel A.t| are the trading volume in lots and the absolute return respectively on stock i on day t during the period before the announcement and after the ex-day.156) 695 (0.023 0.668 60.06) 1-50 Median Mean (Trimmed Mean) 60 35.09) 101-153 Median 1.622 (1.146 (-0.769 (0.337 (295.35) 2.375) 257.199 364*** (0.after)ln(VOLi. Period 611.before are the average daily relative trading volume in lots.74) 51-100 Median Mean (Trimmed Mean) 54 212.713 37. ***significant at 10%.t)/ Σt(|Ri.060 (0.after and relVOLi.36) ALL Median Mean (Trimmed Mean) 53 208.308) 0. *significant at 1%.750) 0.776) 278. The daily relative trading volume in lots is calculated by dividing the unadjusted trading volume by market volume for each day.158 (54.073.**significant at 5%. The change in the market depth ratio for security i is measured as ln(MDi. Raw trading volume Sorted Groups Lots of Shares Mean (Trimmed Mean) Pre Ann.452) 0.073) 0.106 -0. 0.472.065) Paired Diff.833 (1. %∆LN>0 tests (p-value) 0.179.after and VOLi.after)-ln(relVOLi.274) LN Diff.198 -0. The change in relative trading volume for security i is measured as ln(relVOLi.33 (0.805 1.t|) where VOLi.519.992 (37.167 1.633 (241.497 1.04) 800*** (0.before are the average adjusted daily trading volume in lots.after)-ln(MDi.08) 40 35 .249 (0.before) where VOLi.073 (450.before) where the market depth (MD) is measured as Σt(VOLi.42) -1.Table 5.163 0.11** (0.742 (482. The change in raw trading volume for security i is measured as ln(VOLi.918 324.246) 5. Liquidity Analysis This table shows three different measures of the change in the liquidity of 153 (decrease in sample size due to 4 outliers and lack of volume data for 4 observations) bonus issue announcements comparing the liquidity for the period (-140 to -21) relative to the announcement date to the liquidity for the period (+21 to +140) relative to the bonus issue delivery date/ex-day.before) where relVOLi.042 (0.65*** (0.094 245.636.t and |Ri.92 (0.004) 40.275) Post Ex Period 649.

065 (1.25* (0.00) 51-100 Median Mean (Trimmed Mean) 78 0.0021) LN Diff.306 0.0062 (0.54) 48 39.291.107) 819** (0.391.086 (0.983) 0.0057) 0.44) 101-153 Median 0.66* (0.Table 5 – Cont.0043) 0.0036 0.01) 61 1.042* (0.0028 (0.0004 0.119 0.080) 9.388 1.05) 2.0009 0.888) Post Ex Period 25.726 1.0031 0.537.0015 (0.560 0.0001 0.02) 0.08) 56 8.651.054 (0.094) 1.0005 0.118* (0.0006) 0.784 (2.135 36 -0.722) 0.182 -0.294.785.118 (0. 0.119.330 (1.75*** (0.78 (0.540.299 62.756 42.00) 4.011 509 (0.61 (0.017 (55.310 (58.052 (-0.903 (11.0136) Post Ex Period 0.362) 0.56) Median .022.23) -0.543) 1.553.48) 55 Panel C.147. %∆LN>0 tests (p-value) 6.280*** (0. Period 0.557 (0.959 60.64) 57 8.892 (19.0004) 0.60* (0.0020 (0.164 12.547 (0.457 0.845.0010 0.669 9.044.039 796 (0.349 (0.00) 6.333.376.0001 (0.0006 (0.932) Median Mean 101-153 (Trimmed Mean) 11.46 (0.065) 763 (0.00) ALL Median Mean (Trimmed Mean) 69 0.0052 (0.387.348) 6.546) Paired Diff.137* (0.00) 0.496.0011) 1.187.277.0050 0.561.367) LN Diff.0005 (0. Market depth ratio Sorted Groups Lots of Shares Mean ALL (Trimmed Mean) Pre Ann.502.515.646 (9. Relative trading volume Sorted Groups Lots of Shares Mean (Trimmed Mean) Pre Ann.660) Median Mean 51-100 (Trimmed Mean) 1.00) 1-50 Median Mean (Trimmed Mean) 76 0.59** (0.396.0001) 0.271) Median Mean 1-50 (Trimmed Mean) 10. tests (p-value) %∆LN>0 1.607 (17. 0.123) Paired Diff.896 2.713. Panel B. Period 23.

63*** 0.48 1.36* 3.05 381. several financial ratios with sample averages and medians are calculated for the fiscal years ending before the event (t-1).86 16.36 70.61* 74.33 1. the event year (t) and the year after the event (t+1).10 49.**significant at 5%.56** 2.90* 1.45 2.78 136.39 2.04 4.34** 2.59 334.17 0.29 442.11 2.(t to (t+1)).13 276.57 1.35** 37 .28 55.72* 1.29 0.83 75.47 72.06 239.07 14.21 Difference tests (t-test for mean.((t-1) to (t+1)).23** 71.82 74.94 0.07 1.03 0.80 0.89 16.56 14.37 0.87*** 1.22 94.16 0. Parametric t-test for the mean and the non-parametric Mann-Whitney U-test for the median are both used to detect the statistical significance of changes in mean and median between the three periods ((t-1) to t).27 29.84 48.11 16.17 146.68 63.87 96.50 1.85 1.90 0. Operating Margin and Financing Analysis In this table.48 14.20 0.89 41.43 65. *significant at 1%.96 0.78 106.20 0.15 0.94 52. MW U-test for median) (t-1) to t t to (t+1) (t-1) to (t+1) 1.95 0.40 46.79 77.93 143.59 0.92*** 1.04 0.Table 6.62 656. ***significant at 10% Fiscal year relative to event year t t-1 t t+1 Operating Margin (%) Mean Median Debt/Equity (%) Mean Median Debt/Paid-in Capital (%) Mean Median Short-term Debt/Total Debt (%) Mean Median Debt Growth Rate (%) Mean Median Short-term Debt Growth Rate (%) Mean Median 60.43 1.44 0.55 34.

577 (2. the upper value is the regression coefficient and the lower value is the White heteroskedasticity-consistent t-statistic for that coefficient. BDR is the bonus distribution ratio.259 (-2. Determinants of the Bonus Issue Distribution Ratio This table shows the regression results of the following model explaining the determinants of the bonus issue distribution ratio. P is the natural log of unadjusted stock price at the end of quarter before the bonus issue announcement. ***significant at 10% BDRi = α0 + α1Pi + α2MVi + α3DCPi + εi Intercept Stock Price Market Value Debt to Paid-in Capital α0 4.11)* Adjusted R2 F-stat.93)* α1 0. *significant at 1%. In the following results.66)* α2 -0.96* 38 . DCP is the debt to paid-in capital ratio at the end of quarter before the bonus issue announcement.546 (3.37% 33.097 (4. MV is the natural log of market value of equity in US$ at the end of quarter before the bonus issue announcement. 40.84)* α3 0.**significant at 5%.Table 7.

i = α0 + α1BDRi + α2MVi + α1Pi + α4CAR(-21. R2 F-stat. ***significant at 10% CAR(0.73% 12.012 (-1.i + α5DBONi + α6DCGRi + εi Bonus Dist.012 (-1.025 (0.026 (4.36) Α5 -0.+1).28% 10. BDR is the bonus distribution ratio. DBON is a dummy variable having a value of 1 if the corporation does not have a bonus issue in the previous year.015 (-1.13* 0.28) -0. Determinants of the Market Reaction This table shows the regression results of the following model explaining the determinants of the market reaction CAR(0.40) α1 0. the upper value is the regression coefficient and the lower value is the White heteroskedasticityconsistent t-statistic for that coefficient.Table 8. 140) α0 0.36) Adj. *significant at 1%.004 (-0.005 (-0.026 (4. P is the natural log of unadjusted stock price at the end of quarter before the bonus issue announcement.004 (0. MV is the natural log of market value of equity in US$ at the end of quarter before the bonus issue announcement.026 (1) (0. Ratio Market Value Market Price Bonus Dummy Capital Gain Reserves Dummy Inter CAR (-21. CAR is the cumulative abnormal return for the period -21 to -140 relative the announcement day 0.-140).90)*** -0.80)* α2 -0. DCGR is a dummy variable having a value of 1 if the bonus issue announcement includes “capital gain reserves” as one of the sources of the capitalization.001 (-0. In the following results.74)* -0.40) 39 .90)*** α4 -0.21) α3 -0.45) α6 0.001 (-0.23) -0.42) (2) 0. 27.21* 27.014 (-1.**significant at 5%.+1).

Kryzanoswki and Hao. Bechmann and Raaballe. In our study. Balachandran et al.htm). the direct costs of bonus issues such as approval fees and accounting fees are low adding up to on average 0. Leledakis et al. and Titman (1984) and Rankine and Stice (1997) for the US evidence. Germany. (2000) find no support for the signaling hypothesis in Germany and Greece. but since corporations typically issue their shares at the minimum legally possible par value. Barnes and Ma. (e. 9 Similarly. Japan. Dhatt et al. 1997. Wulff. India. Hong Kong. 40 .. Denmark. 2004. we find a mean short-term debt to total debt ratio of 75% for the period 1995-2006 in our sample. the institutional settings in Germany and Greece limit the ability of companies to use stock distributions for signaling (Wulff. 1991. 2000. corporations can not split stocks to a lower par value. 2002. since the establishment of ISE in Exchange as it is in the U. Kunz Rosa-Majhensek. for example. 1997 for more details). 5 1986. the authorized capital of the corporation.ise. 7 As Kamiler (2006) shows. 2007.. (see Rankine and Stice. Lukose and Rao.. and the stock delivery dates are supplied along with other seasoned equity offerings data. Similar institutional settings such as minimum mandatory par values for stocks are found in Switzerland (Kunz and Rosa-Majhensek.. Papaioannou et al.. Masulis. 4 The accounting treatment for large and small bonus issues is not different in the Istanbul Stock In this database (http://www.g. 6 Similarly. 2002) leading to stock splits whenever the minimum par value amount is lowered. Wulff (2002) and Papaioannou et al. 8 Demirag and Serter (2003) show that the ownership of Turkish companies is highly concentrated. Greece..S.. 2000). families being the dominant shareholders. Wu and Chan. 2007) and Germany (Wulff.org/company/capitaldividend. we could not detect any cases of stock splits during our sample period. 2002. It is very rare that bonus issue distribution decisions are made in an extraordinary shareholder meeting. 1997. 2000.5% of the amount of the issue. 2007). China. 2 A similar corporate practice has been used in Greece due to high levels of inflation since the early 1970s (see Papaioannou et al. Canada. Similar market reactions are also detected in other markets such as Australia. Kato and Tsay. Korea and Switzerland. 2008). Leledakis et al. 2002.Notes: 1 See. for each year.. the amount of bonus issues and stock dividends. Grinblatt. 2002. typically a board of directors decision is enough for implementing the bonus issue distribution. the paid-in capital of the corporation before and after the capital increase. 2008 and Papaioannou et al. 3 Stock splits are allowed in Turkey. 2002.

14 As Bechmann and Raaballe (2007) point out. 15 Similarly. 11 The official ISE daily bulletins published in 1995 and after are used as the mandatory information disclosure requirements and standards have been introduced during the second half of 1994 by the Capital Markets Board. Due to the inflation effect on the earnings figures and instable dividend policy adopted by the ISE corporations. For our sample. stock dividends and stock splits are typically implemented after a period of stock price increase leading to potential bias in using the pre-event estimation period and they use a post-event estimation window. 17 Typically. The test results are quantitatively and qualitatively similar to those reported in the paper. 41 . studies on stock distributions use earnings per share and dividends per share as proxies for the signaling hypothesis. namely the market model and mean adjusted model. the liquidity measures are computed for a limited time period of 120 trading days (±6 months). 12 It should be noted that bonus distribution ratio is also equivalent to the percentage increase in the number of shares outstanding. the cumulative abnormal return for the estimation period (-21.. Heron and Lie. more biases will be introduced by using a post-estimation period due to possible effects of the stock delivery (ex-day) which is on average 69 trading days apart for our bonus issue sample. 16 Since corporations trading in the ISE distribute bonus issues frequently and in order to avoid the confounding effect of another bonus issue in the previous and subsequent year. 13 Two other models. earnings and dividend announcements and with no official daily bulletin news around ±5 day around the announcement day.10 The uncontaminated bonus issue announcements include the board of director’s decision announcements with no simultaneous corporation specific news such as rights offerings. none of the stocks in the sample has missing trading price data eliminating the non-trading problem in event studies.-140) is statistically insignificant and in the Turkish setting. are also used for measuring the market reaction. 2004). some studies use the operating margin as a proxy (e. Muradoglu and Aydogan (2003) do not use the volume turnover as an indicator for liquidity since the average percentage of corporation equity open to public is 26% and the minimum listing requirement by the ISE for free float is only 15% of outstanding shares. Additionally. the capital markets regulatory body. we do not use these two proxies and instead.g.

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