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An Analysis
Pitabas Mohanty
35
Sample
The entire sample period 1982-1996 is divided
into two sub-periods, viz., 1982-91, and 1992-96. Such
a division was made to account for differences in the
sources of data. Data for the 1982-91 period were
obtained from the Stock Market Yearbook (SMYB)
published by Quantum Financial Services Private
Limited and for the 1992-96 period from the Prowess
Database of CMIE. Information on 250 companies was
available on SMYB. Though it is desirable to have the
same sample in both the sub-periods, it could not be
done for the following reasons.
Some companies have already been merged with
one another.
Some companies no longer exist or have been
referred to the BIFR.
Information about certain companies is also not
available in the CMIE Database. Therefore, in the
second sub-period, the sample size got reduced to 201.
As already mentioned, one of the objectives of
this paper is to study the behaviour of the dividend
rate of the companies after the bonus issue is made.
The following section broadly summarizes the findings for both the periods.
First Sub-period
Bonus Ratio*
A
B
C
D
Total
No of Bonuses
2
90
99
45
236
* Here, a m:n bonus ratio means that for each n shares the
shareholder has, he/she will get m shares free.
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D Total
0
1
15
25
27
24
12
18
54
68
1
0
44
6
39
0
14
1
98
7
0
2
0
90
9
99
0
45
9
236
Second Sub-period
Bonus Size
A
B
C
D
Total
No of Bonuses
4
52
62
16
134
D Total
0
1
11
12
12
11
6
5
29
29
3
0
26
2
27
0
3
0
59
2
0
4
1
52
12
62
2
16
15
134
Less
1:1
1:2
1:2
and
1:1
38
5
1
1
45
88
39
2
6
99
74
0
5
2
90
than
Increases
Increase2
Increasel
Decrease
Total
More
Total
than
1:1
2
17
0
0
2
202
8
9
236
Less
than
Increases
Increase2
Increasel
Decrease
Total
1:2
11
0
0
5
16
1:2
and
1:1
53
2
0
7
62
1:1
More
Total
than
45
2
2
3
52
1:1
4
0
0
0
4
113
4
2
15
134
Average Rupee
Dividends Before
the Bonus Issue
(Rs)
Average Rupee
Dividends After
the Bonus Issue
(Rs)
2.05
5.20
18
B
C
D
7.37
15.67
8.04
5.37
13.73
46.27
16.6
7.24
26.16
20.26
5.58
2.45
Growth Rate of
Dividend Per
Share Before the
Bonus Issue (%)
Growth Rate of
Dividend Per
Share After the
Bonus Issue (%)
of transactions as a proxy for liquidity. 7 The information about the number of transactions was obtained
from the Stock Exchange Review/Directory for the period
1988-97. Data about the earlier period could not be
obtained. The SMYB gives the average trading volume
for the year 1992 only. The average daily number of
shares was found for sixty trading days before and
after the stock went ex-bonus (XB). The percentage
increase in the number of transactions was computed
for this period. The average increase was 91.43 per
cent and the corresponding t-statistic was 3.16. Thus,
the number of transactions after a bonus issue in creased on an average by 90 per cent. It is important
to note that this number has an upward bias. If the
denominator is small, then the percentage increase will
get magnified. In 28 per cent of the cases, the postbonus number of transactions was actually lower than
the corresponding pre-bonus figure.
It is decided to compare the returns that the bonus
issuing companies have been able to generate vis -avis the companies that have rewarded their shareholders via an increase in dividend rate year after year
in the same period.
Here, the returns of bonus issuing companies were
compared8 only with companies that maintained a
steadily increasing dividend rate and not with nonbonus issuing companies because there was no theoretical reason as to why the bonus issuing companies
would be able to generate a higher yield compared
to the companies that do not offer any bonus issue.
A company that has got a good investment proposal
that can yield a return that is higher than its cost of
capital will be able to generate more returns if it invests
in that proposal than if it gives its earnings as
dividends.
No attempt has been made to see the effect of
bonus ratio on the stock returns. This is because the
companies do not necessarily maintain the same bonus
rate. Bata India, for example, issued bonus shares in
the ratio of 2:5 in 1984 and in the ratio of 1:1 in 1987.
This study computes how much return Bata India had
39
"i
capitalization figures of 1991 (in case of the first subperiod) and 1996 (in case of the second sub-period).
Explanation for Poor Performance of the Bonus
Issuing Companies in the Second Period
Average Beta
1982-91
0.85
1992-96
0.98
40
Average Beta
1.1
-0%
0.97
13%
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Conclusions
A study of the dividend and bonus policies of Indian
companies revealed that most of the companies do
not maintain a constant payout ratio. Most of the
companies reward their shareholders by offering a
bonus issue. The dividend rate does not fall proportionately in most cases and hence the cash dividend
paid to the shareholder increases after a bonus issue.
It was observed that most of the companies have been
successful in maintaining (or at least not reducing)
Notes
1
Here companies are divided into bonus issuing and nonbonus issuing in both the sub-periods independently. Thus,
any company that has offered even one bonus issue in the
first sub-period was treated as a bonus issuing company.
However, if the same company has not offered any bonus
issue in the second sub-period, then it is treated as a non bonus issuing company.
41
References
Chandra, P (1997). "Dividend Policy: Practical Aspects" in
Financial Management: Theory and Practice, Fourth Edition, Chapter 15, New Delhi: Tata McGraw Hill.
Charest, G (1978). "Split Information, Stock Returns, and
Market Efficiency," Journal of Financial Economics, Vol 6,
pp 265-296.
Fama, E F (1976). Foundations of Finance, New York: Basic
Books.
Fama, E F and Babiak, H (1968). "Dividend Policy: An
Empirical Analysis," Journal of the American Statistical
Association, December, pp 1132-1161.
Fama E F; Fisher, L; Jensen, M and Roll, R (1969). "The
Adjustment of Stock Prides to New Information," International Economic Review, February, pp 1-21.
Grinblatt, M S; Masulis, R W and Titman, S (1984). "The
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