Another Look at Corporate Actions

By Mark DeWeaver.

In this old post from 2010, I considered the possibility that ISX share prices might fail to adjust completely for corporate actions. There didn’t seem to be much evidence for this but it was a bit hard to be sure. In those days, stocks would generally be suspended for a number of months following rights and bonus issues. Discrepancies between theoretical and actual ex rights prices might as easily be due to developments during the long intervals between cum rights and ex rights trading dates as to a failure to reflect changes in the number of shares in issue.

In September, 2011, the ISX changed the rules on stock suspensions to allow trading to resume within four weeks of shareholders’ meetings (see this post). Following this dramatic reduction in suspension periods it should be now easier to identify departures from theoretical ex-rights prices. Given the importance of corporate actions to ISX investors, I thought it would therefore be worth revisiting this question with some more recent data.

Since the end of 2012, the “Corporate Actions” table in the Rabee Securities monthly gives 78 examples of rights, bonus, and dividend issues. Taking out cases where the cum rights price was below IQD 1.00 (in which case minority shareholders would be unlikely to subscribe) and a few others where I thought the stocks were too thinly traded for the prices to be meaningful, I ended up with a sample of 49 observations.

The chart shows the premium/(discount) of actual to theoretical ex-rights prices, where the theoretical price is the last traded cum-rights price adjusted for rights, bonuses, and dividends. For example, if the cum-rights price were IQD 2.00, following a 50% rights issue, a 30% bonus issue, and a IQD 0.25 dividend, the theoretical ex-rights price would be: (2.0+0.5-0.25)/(1.0+0.5+0.3)=1.25. (Note that the dates following the ticker symbols on the x axis are for the start of ex-rights trading.)

In half of the cases actual prices deviated by no more than 5% from the theoretical prices; two thirds of the time the difference was no more than 10%. Extreme examples of over- or under-adjustment were relatively rare.

Once again there doesn’t seem to be much reason to expect outsized gains or losses following corporate actions.

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