Rate of return under re-capitalisation: A note

Abstract

The measure in (6) is suggested as the most appropriate measure when n is over a month or so for it explicitly takes into account time value. For small n (e.g. daily returns), we can assume k=0, n=1, and therefore, the time value is not an issue and we can simplify (6) as: {Mathematical expression}. The above is the same as equation (3) except for the imputation of impact of issue premium which is zero for bonus issue. Note that for event studies, the cumulative average returns (CAR) calculated around the ex-event dates depend a great deal on how the returns are calculated. Our argument implies that if (4) is used instead of (5) or (6), the CAR would have been higher. This could lead to a misleading interpretation that there is an ex-date positive effect on prices if in fact (for example) there is none. It is also evident from the discussion that research using monthly data is more likely to be affected by the systematic bias in the return calculations than would be the case using daily returns. We suggest that financial research findings have to be interpreted considering this bias in return calculation under re-capitalisation. © 1988 School of Management National University of Singapore.