1.1 Background of the Study
Market efficient hypothesis states that market prices fully and instantaneously reflect all relevant available information in determining security prices and that it is not possible for market participants to consistently and purposefully outperform a given market using any information that is already known by the market. This implies that market efficiency is consistent with a market in which (a) there are no transactions costs in trading securities, (b) all available information is costless to all market participants, and (c) all participants in the market are rational in decision, suggesting that all agree on the implications of current information for the current price and distributions of future prices of each security (Fama, 1970). In such a market, the current price of a security obviously “fully reflects” all available information. But the speed and manner in which the market adjusts to the relevant information on dividend and bonus issues declaration, has been punctuated by untimely release of information and poor behaviour of the authorities. The excruciating influence of timidity that could emanate from insecurity of investors due to the intending insider trading and fall in investors’ confidence, deters trading activities and the performance of the market (Manasseh, Asogwa and Agu, 2012). As the major ingredient needed to step up business activities in the market, consolidating business confidence could promote the ability of the market in mobilising the needed savings for investment. Therefore, to harness funds from local and foreign investors for viable investment opportunities, the need for information efficient market should be given precedence for the enhancement and restoration of depleted trust in the market (Manasseh et.al, 2012).
In information efficient market, prices of shares adjusts quickly to new information and enable more informed and efficient investment choices (Osinubi, 2000). In such markets, investors do not care about various trading strategies by fundamentalists, technicalist or chartists to beat the market with the bid of earning abnormal returns. But in the Nigeria capital market, the case is the reverse. In most cases, investors pay extra money to acquire additional information and sometimes go as far as sourcing for insider information on the values of companies listed with the exchange. So far, before certain information is announced, some investors have already traded on the information, causing disparities in available information among market participants. For instance, on June 3rd 2005, Intercontinental Bank Plc, acquired by Access Bank Plc in 2011, announced bonus issues of 1 for every 10 shares simultaneously with the declaration of N0.22 dividend for its shareholders. On this note, it was expected that the market should have reflected the publicly available information on bonus issues and dividend without bias to avoid the possibility of investors beating the market by making abnormal profit. But it was noticed that people started trading on the shares of this firm five days before the announcement date. Five days before the event date, the share price of the Bank stood at N7.81, N7.81, N7.81, N6.90, and N6.90 respectively even higher than the share price of the firm on the day of the announcement (N6.24). After the announcement date, it fell to N5.93, N5.64, N5.36, N5.10 and N5.13respectively (NSE, various years).
Similarly, on 3rd August, 2007; 25th July, 2008; 31st October, 2008 and 15th August, 2008, it was also observed that shares of Zenith Bank Plc, Floor Mills Plc, Union Bank Plc and Union Homes Savings Plc respectively were seriously traded five days before the date of announcement on simultaneous declaration of bonus issues and dividend leading to a fall in share prices of these firms on and after the announcement date (NSE, various years). Thus, disproportions in the information available to equity issuers or investors could results to overpricing or under pricing of shares (Edmans, 2009; Ayadi and Bouri, 2009 and Gao, 2008). When a share is overpriced or underpriced as a result of insider information, the level of confidence in the market would be deterred and the returns of the firms would be affected. In turn, the contributions of the firms to all share indexes and the market capitalisation would be insignificant. This is because, Investors who are always risk averse could withdraw their money or invest it in other less productive ventures, leaving the market performance gauges in a shamble state (George and Oseni, 2012). Hence, the efficiency of the Nigerian capital market in terms of quick incorporation of all available information correctly and instantaneously is of paramount important. So, when new information is added to the market, its revaluation implications on security returns are impounded in the current market price unbiased (Gagan and Mahendru, 2009). In such markets, firms make productive investment decision while investors choose among the securities that represent ownership of firms’ activities without the anxiety of making losses (Afego, 2012).