Abstract:
This thesis examines whether bonus issues signals positive firm information to investors in the Chinese stock market. Using a standard event study methodology, the valuation effect of bonus issue announcements are examined for the period from 1996 to 2010. I find that, on average, stock prices react positively to bonus issue announcements. Firms announcing higher bonus ratio, firms with smaller market capitalisation, and firms with high book-to-market ratio, experience higher valuation effects around the announcement date. Bonus issuing firms also experience significantly higher operating performance and earnings growth in the years surrounding the announcement compared to non-bonus issuing companies matched on industry and firm size, with the difference becoming more pronounced for high bonus firms. Lastly, I show the operating performance in the year after the announcement is significantly correlated to the bonus ratio and 3-day abnormal return. Overall, I show bonus issues are used by managers to convey positive future firm prospects to investors, and that investors interpret bonus issues as a credible signal for firm performance.