Sunday, February 24, 2008

Event studies: Bonus issues / Stock splits / pre-budget trades / index inclusions

Kaushik & Deepak have put a nice event study on investments in companies that have announced bonus or stock splits on their joint initiative Moneyoga. Their hypothesis :and the subsequent conclusion are as follows:

Hypothesis: Buy stocks of companies that have declared a bonus or split.

The verdict

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.
The full article with a nice graph depicting how the strategy works over a period of time can be accessed here.

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] be updated for more recent data soon !

2). Does one gain by investing in stocks to be included in the Sensex ? [Link]

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