A large number of bonuses are not made for financial reasons.

The Perils of Chasing Bonuses:  A large number of bonuses are not made for financial reasons. 

In the US, stock splits are made after a long period of rapid rise in the price of the stock.  This is done largely to reduce the price of the stock to make it more marketable (or so the management believes).  However, the same reason does not seem to apply locally. 

• First, on the whole, there is little upward price movement before the decision to declare a bonus issue is made.
• Second, a very high proportion (about one-third) of the companies fail to increase (on an adjusted basis) its dividend payout after the bonus issue has been made. 

If there is very little upward price movement in the first place and if so many of the companies cannot increase its post-bonus dividend payout, why then do these companies bother to declare a bonus at all? 

The implication must be that a large number of b onus issues are not made for the usual financial reasons (i.e. to lower the price, to reflect higher earnings capacity etc).

It is more than possible that a large number of bonus issues are made for the purpose of giving a temporary boost to the price of the stock.  As to why any company should desire to achieve a temporary boost in the price of stocks, the inevitable conclusion is that a large number of bonuses are made for the purpose of benefiting insiders and their friends.  This is an extremely serious indictment made only after the most careful reflections.

Why some insiders should want to give the price a temporary boost? 

A sharp rise in price provides insiders with the opportunity to sell shares which they had picked up on the cheap before the price was artificially boosted.  This is only the average picture and the average picture is not representative of all the firms which give bonuses.  It does not mean that all local companies which declare bonuses are doing so to benefit from a temporary boost in price.

It is likely that local companies are made up of at least two types.

• The first are those in which the insiders do not have an interest in seeing the price being temporarily boosted, and
• The second are those in which the insiders do have this desire. 

It is likely that the former would not experience much price movement prior to the announcement while the latter would.  This would be the primary way by which we can separate the two classes of companies. 

Are there evidence to suggest a great deal of insider trading prior to some bonus announcements?