Bonus Issue, Share Split, Share Consolidation, Capital Reduction, Special Dividend Payout (Capital Repayment) and Share Dividend and any other types of corporate exercises have no value add to the shareholders’ value. Even Right Issue with an issue price that is lower than the market price will not have positive impact to the shareholders’ value. If the shareholder who does not want to further pump in more capital into the company by subscribing the additional Right Shares at a discount to its market price, the shareholder’s right will be greatly diluted.
Basically these kind of corporate exercises are transferring the money from the left pocket to the right pocket in disguise to mislead the shareholders that their value in the company has increased. Do you think the value 10 pieces of RM10 would be more than the value 1 piece of RM100?
There are always justifications from analysts about the corporate exercises would bring positive impact to the shareholders’ value, whereby my opinion is “it depends”. So what could be the actual impact of such corporate exercises? Please refer below:-
1) Increase the number of shares will increase the liquidity of the shares will reduce the illiquidity premium and thus share price would increase;
2) Supply of shares increase substantially and this would shift the supply curve right-ward and thus decrease the share price; and
3) Most of the corporate exercises do not change the shareholders’ value of the fund but they engage investment bankers to carry out the corporate exercises, and these investment bankers are not cheap. So the shareholders’ value indeed decreases due to expenses pay investment bankers.
Of course analysts would try to play around the abovementioned points to justify when to “buy and sell”. When the market is in bull run, they would say it’s good to have Bonus Issue as it increases the liquidity of the shares; when the market is in bear mood, they would say Bonus Issue will cause excess of supply which subsequently reduce the share price. Basically I would say these analysts have no view and are bullshitting.
As a conclusion, a company will only increase its shareholders’ value through its daily operating activities, not via some kind of complicated corporate exercises or financial activities. Know how to calculate the basis of the corporate exercises would be the way to discover the trick of the accounting games.
Basically these kind of corporate exercises are transferring the money from the left pocket to the right pocket in disguise to mislead the shareholders that their value in the company has increased. Do you think the value 10 pieces of RM10 would be more than the value 1 piece of RM100?
There are always justifications from analysts about the corporate exercises would bring positive impact to the shareholders’ value, whereby my opinion is “it depends”. So what could be the actual impact of such corporate exercises? Please refer below:-
1) Increase the number of shares will increase the liquidity of the shares will reduce the illiquidity premium and thus share price would increase;
2) Supply of shares increase substantially and this would shift the supply curve right-ward and thus decrease the share price; and
3) Most of the corporate exercises do not change the shareholders’ value of the fund but they engage investment bankers to carry out the corporate exercises, and these investment bankers are not cheap. So the shareholders’ value indeed decreases due to expenses pay investment bankers.
Of course analysts would try to play around the abovementioned points to justify when to “buy and sell”. When the market is in bull run, they would say it’s good to have Bonus Issue as it increases the liquidity of the shares; when the market is in bear mood, they would say Bonus Issue will cause excess of supply which subsequently reduce the share price. Basically I would say these analysts have no view and are bullshitting.
As a conclusion, a company will only increase its shareholders’ value through its daily operating activities, not via some kind of complicated corporate exercises or financial activities. Know how to calculate the basis of the corporate exercises would be the way to discover the trick of the accounting games.
