Abstract

The objective of this study is to examine the stock price reaction to the bonus issue announcement in Dhaka Stock Exchange (DSE) in Bangladesh. Data of all the 136 right issues from six different sectors, i.e., Engineering, Cement, Food & Allied, Fuel & Power, Pharmaceuticals & Chemicals, and Textile during 2009 to 2012 combined with the standard event study methodology has been used for this purpose. Findings reveal statistically significant abnormal returns on and around the bonus issue announcement dates which supports signaling hypothesis for Bangladesh and also implies that investors have anticipated the informational content of the event, or that they have gained access to inside information. However, sectoral decomposition of returns showed quite paradoxical results. Cement, Food & Allied, Fuel & Power, and Pharmaceuticals & Chemicals sector supports long-established theories that the stock market reacts positively to the announcement of a bonus issue. However, Engineering and Textile sector illustrates the opposite. Results of this study imply that DSE is not semi-strong form efficient with respect to past information on bonus issue announcements. Also, information leakage before the announcement of bonus issues raises serious questions against efficiency in regulation and effectiveness of supervision in DSE.

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