The Effect of Announcing a Change in Shareholders' Equity Structure on Corporation's Stock Market Price and Future Profitability-An Empirical Study on Egyptian Stock Market

Abstract

Research Background

This study investigates the effect of announcing a change in the shareholders' equity structure of corporations listed in the Egyptian stock exchange on their stock market prices and future profitability in the period from 2006 through 2008. According to the Egyptian accounting standard number 1, financial statements presentation, there are two main sources of changes in shareholders' equity structure of a corporation: First, changes resulting from transactions with company's shareholders such as: stock split, stock dividend and stock repurchase. Second, changes resulting from transactions with other than the company's shareholders and these changes will eventually be summarized in the number of net income (or loss) that is presented in the income statement for each accounting period. Therefore, the study is mainly concerned with examining the effect of announcing stock split, stock dividend or stock repurchase (changes resulting from the first source) on future profitability (changes that will result from the second source). Stock split, stock dividend and stock repurchase are becoming very popular forms of change in shareholders' equity structure. In particular, these three events change the shareholders' equity structure as follows: Firstly, in a stock split a certain number of new shares are substituted for each old share 1

and the sum of the par values of the new shares equals the par value of the old share. In this way,