Efficient Market Hypothesis (Emh) and Nigerian Capital Market: An Analysis of Bonus Issues and Dividend Announcement.
ABSTRACT
The study examined the efficient market hypothesis and Nigerian capital market in relation to information contained in dividend and bonus issues announcement to ascertain the speed at which the market adjusts to all the relevant available information on share prices of the listed firms in the main board market. To estimate the speed of adjustment of daily share prices of 33 sampled firms listed in the market in semi-strong form, market model developed by Fama (1969) is employed.
From the findings, the study reveals positive and significant abnormal returns (ARs) for most of the days around the 41-days event window (-20, 0, +20). The evidence shows that share prices of main board market do not adjust quickly to dividend and bonus issues announcements thus, suggesting that the market is not efficient in semi-strong form. The study also investigated if the market anticipated the information contained in the event by examining the share price movement of the sampled firms around the estimation window.
The results revealed that the abnormal returns (ARs) and average abnormal returns (AARs) of most of the days in the estimation window tend to stay significantly negative at 5% and 1% level. The significant and negative ARs and AARs that surround the estimation window implies that event actually do convey information to the market, but the market was unable to adjust quickly to the conveyed information due to the continuous drift in average abnormal returns (AARs) over the estimation window, suggesting serious anticipation of the information.
TABLE OF CONTENT
Title Page – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – i
Approval – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ii
Certification – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – iii
Dedication – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – iv
Acknowledgement – – – – – – – – – – – – – – – – – – – – – – – – – – – v
Table of Contents – – – – – – – – – – – – – – – – – – – – – – – – – – – – vi
List of Tables and Figures – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – viii
Abstract – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ix
Chapter One:Introduction:
1.1 Background of the Study – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1
1.2 Statement of the Problem – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5
1.3 Research Questions – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 9
1.4 Objective of the Study – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 9
1.5 Hypotheses of the Study – – – – – – – – – – – – – – – – – – – – – – – – – – – – 10
1.6 Scope of the Study – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 10
1.7 Justification of the Study – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 11
Chapter Two: The Nigerian Capital Market:
2.1 Historical Evolution of the Nigerian Capital Market – – – – – – – – – – – – – – – 13
2.2 Information Dissemination in the Nigerian Capital Market- – – – – – – – – – – – – – – -19
2.2.1 The Security and Exchange Commission – – – – – – – – – – – – – – – – – – – – – – 20
2.2.2 The Nigerian Stock Exchange – – – – – – – – – – – – – – – – – – – – – – – – – – 20
2.2.3 Annual Reports of the Quoted Companies – – – – – – – – – – – – – – – – – – – – – – – – – – 20
2.2.4 Financial Press – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 21
2.3 Overview of the Nigerian Capital Market Performance – – – – – – – – – – – – – – -21
Chapter Three: Review of Theoretical and Empirical Literature:
3.1 Conceptual Framework – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 26
3.2 Theory of Rational Expectation and Efficient Market Hypothesis – – – – – – – – 31
3.3 Development of Efficient Market Theory and Proceeds to Discussing Hypothesis- -32
3.4 Development Concept and Capital Market Efficiency into Modern Form- – – – – – – 34
3.5 Models for Testing Market Efficiency- – – – – – – – – – – – – – – – – – – – – – – – 36
3.5.1 The Expected Return or Fair Game model- – – – – – – – – – – – – – – – – – – – – – 36
3.5.2 The Submartingale Model- – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 38
3.5.3 The Random Walk Model- – — – – – – – — – – – – – – – – – – – – – – – – – – – – – – 39
3.5.4 The Origin of Capital Asset Pricing Theory- – — – – – – – – – – – – – – – – – – – – 40
3.5.5 Arbitrage Pricing Theory- – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 42
3.5.6 The Market Model – – – – – – – – – – – – – – – – – – – – – – – – – – — – – – – – – – 44
3.6 The Uncertain Information Hypothesis- – – – – – – – – – – – – – – – – – – – – – – – – 45
3.7 Information Content of Dividend Announcement – – – – – – – – – – – – – – – – – 46
3.8 Information Content of Bonus Issue Announcement – – – – – – – – – – – – – – – 47
3.9 Review of the Empirical Literature – – – – – – – – – – – – – – – – – – – – – – – – 48
3.9.1 Evidence from Developed Markets – – – – – – – – – – – – – – – – – – – – – – – – – – 48
3.9.2 Evidence from Emerging Markets – – – – – – – – – – – – – – – – – – – – – – – – – 53
3.9.3 Previous Research in Nigerian Capital Market Efficiency – – – – – – – — – – – – – – – 55
3.10 Critics of Efficient Market Hypothesis – – – – – – – – – – – – – – – – – – – – – – 61
3.10.1 Market Anomalies- – – – – – – — – – – – – – — – – – – – – – – – – – – – – – – – – – – – 65
3.11 Evaluations of Previous Studies in Nigeria- – – – – – – – – – – – – – – – – – – — – – – – – 67
Chapter Four: Theoretical Framework and Research Methodology:
4.1 Theoretical Framework – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 70
4.2 Specification of Event, Event window, Estimation and Investigation window – – – 72
4.3 Sample Selection criteria and sources- – — – – – — – – – – – – – – – – – – – – – – – – 72
4.4 Daily Return – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 73
4.5 The Market Model – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 74
4.6 Testing Abnormal Returns – – – – – – – – – – – – – – – – – – – – – – – – – – – – 76
4.6.1 The Test Statistics for Abnormal Returns – – – – – – – – – – – – – – – – – – – – 76
4.6.2 Testing the Significance of Cumulative Abnormal Returns – – – – – – – – – – – – 77
4.7 Method of Estimation – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 78
4.7.1 Time Line Table and Estimation of Objective of the Study – – – – – – – – – – – – 79
4.7.1a Test of Nigerian Capital Market and Speed of Adjustment – – – – – – – – – – – – – 79
4.7.1b Test of Nigerian Capital Market and Information Anticipation – – – – – – – – – – 80
4.7.1c Test of the Effect of Information on Firm’s Values – – – – – – – – – – – – – – – 80
4.8 Model Justifications – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 80
Chapter Five: Presentation and Analysis of Results:
5.1 Introduction- – – – – – – – – – – – – – – – – – — – – – – – – – – – – – – – – – – – – – – – 82
5.2 Price Reactions to Dividend and Bonus Issues Announcements – – – – – – – – – – 82
5.3 Nigerian Capital Market and Information Anticipation – – – – – – – – – – – – – – 86
5.4 Dividend, Bonus Issues Announcement and Firm’s Value – – – – – – – – – – – – – 90
5.5 The Abnormal Returns and Holding Periods – – – – – – – – – – – – – – — – – – – – 93
5.6 Price Reactions of Blue-Chips to Dividend and Bonus Issues Announcement – – – – 94
5.7 Policy Implications of the Findings- – – – – – – – – – – – – – – – – – – – – – – – – – – -98
Chapter Six: Summary, Conclusion and Policy Recommendations:
6.1 Summary and Conclusion- – – – – – – – – – – – – – – – – – – – – – – – – – – – – 101
6.2 Policy Recommendations- – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 102
6.4 Suggestions for further Research on Efficient Market Test – – – – – – – – – – – – 103
References – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 104
BACKGROUND OF THE STUDY
Market efficient hypothesis states that market prices fully and instantaneously reflect all relevant available information in determining security prices and that it is not possible for market participants to consistently and purposefully outperform a given market using any information that is already known by the market.
This implies that market efficiency is consistent with a market in which (a) there are no transactions costs in trading securities, (b) all available information is costless to all market participants, and (c) all participants in the market are rational in decision, suggesting that all agree on the implications of current information for the current price and distributions of future prices of each security (Fama, 1970).
In such a market, the current price of a security obviously “fully reflects” all available information. But the speed and manner in which the market adjusts to the relevant information on dividend and bonus issues declaration, has been punctuated by untimely release of information and poor behaviour of the authorities. The excruciating influence of timidity that could emanate from insecurity of investors due to the intending insider trading and fall in investors’ confidence, deters trading activities and the performance of the market.
As the major ingredient needed to step up business activities in the market, consolidating business confidence could promote the ability of the market in mobilising the needed savings for investment. Therefore, to harness funds from local and foreign investors for viable investment opportunities, the need for information efficient market should be given precedence for the enhancement and restoration of depleted trust in the market (Manasseh et.al, 2012).
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StudentsandScholarship Team.
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