Working Paper 02-1
by Michelle L. Barnes and Shiguang Ma

Event study analysis is applied to investigate stock price reaction to the announcement of bonus issues for the emerging stock markets of China. Results show that the issues with a high bonus ratio (number of bonus shares in the issue/number of existing shares) usually attract positive returns for both Chinese (A-share traders) and foreign (B-share traders) residents. Issues with a low bonus ratio are rewarded with negative returns for A-share traders and do not stimulate significant activity by B-share traders. The hypothesis of semi-strong form market efficiency is rejected only for small-bonus issues traded on the A-share market; the B-share market displays stronger evidence of semi-strong form market efficiency than the A-share market. Finally, there appears to be additional informational content in the approvals of bonus issues above and beyond that of the proposals, even though most bonus schedules proceed as proposed.

JEL classification codes: G14; G18; O16.

Keywords: Chinese Stock Markets, Efficient Market Hypothesis (EMH), Semi-Strong Form Efficiency, Event Study, Announcements of Proposal or Approval, Underreaction and Overreaction

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