Hypothesis: Buy stocks of companies that have declared a bonus or split.
We obtained several insights into how stocks perform before & after corporate actions such as a bonus or split. Here are the salient ones:
- Bonus stocks
- If you invest an equal amount in every bonus stock on the effective date of the bonus (aka Ex-Date), you would not beat the index (Nifty-50), whether you held it for one day, one week or one year.
- If you invest an equal amount in bonus stocks - but only the large cap ones - you would be better than investing in the small cap ones; yet you would barely match the index returns in the short term; but have to take twice as much risk (drawdown) as the index.
- This is true regardless of the historical time periods tested (bull markets, bear markets, etc.).
- This is true even if you bought the stock as soon as the corporate action was announced - usually 3-4 weeks before the Ex-Date.
- The best scenario is when large-cap stocks are bought as soon as the bonus is announced and are held for 9 months or longer.
- Split stocks
- The same conclusions as for the bonus stocks hold here as well; except that for large cap stocks, the strategy comes close to beating the index in the short term.
While at event studies you might want to look at some of the event studies that I had undertaken in the past. These are:
1). How to play the markets a week prior to the Union Budget. [Link] ...to be updated for more recent data soon !
2). Does one gain by investing in stocks to be included in the Sensex ? [Link]