By Jonathan Kwok

MARKET watchers are divided over the slew of bonus share issues which surfaced during the latest results reporting season, which ended recently.

In a bonus issue, existing shareholders are given new shares for free in proportion to their existing shareholdings. For instance, in a one-for-two bonus issue, shareholders will get one new share for every two existing shares they hold.

The idea is to reward loyal shareholders and to encourage trading of the stock by nudging the price down - which is almost always the result of issuing a significant number of new shares for free.

Most analysts agree that such issues achieve those twin goals of boosting stock liquidity and rewarding long-term investors in the company.

However, some have raised concerns over the unpredictable impact on share price, especially in the crucial period before and after the bonus shares start trading.

When a company issues bonus shares, this results in an enlarged share capital which, in theory, also drives the share price lower to a proportional extent.

However, some market watchers have noted that in some cases, the share price drops by a greater extent than would be expected given the larger number of shares.

Despite this uncertainty, in the past six weeks, about half a dozen companies listed here have announced bonus share issues in conjunction with their financial results. These include residential property developer Hiap Hoe, bakery chain BreadTalk and piping products supplier Cosmosteel.

'(Bonus share issues) increase liquidity, thus making it easier to trade on the market,' said Mr Terence Wong, co-head of research at DMG Securities.

He added that it is normally good news when a company issues bonus shares: It usually means means the business is doing well and that the firm is issuing new shares to reflect growth and expansion.

AmFraser strategist Najeeb Jarhom said: 'The issues serve as a reward to loyal shareholders so that they will stay with the company, and so that they will keep their shares.'

However, Mr Jarhom called into question the argument that the lower share price will actually push up trading volumes.

He said: 'Now, fund managers and big funds don't care if stock prices are high. Share prices of $10 to $15 are okay to them. The stocks will still be affordable compared to US stocks. Thus, liquidity is not an issue.'

Some questions also have been raised about the impact the bonus issues will have on the attractiveness of the stock.

Mr Ken Tai, a senior technical strategist from Kim Eng, said: 'When a firm declares bonus stocks, investors will want to chase after these entitlements. Thus they will firm up support for the stock's price before the ex-date (the date after which bonus shares can no longer be claimed). Sometimes, this can create artificial support for the shares.'

Mr Tai said that after a bonus issue, a share price will usually fall in proportion with the increased number of shares, but some stocks could over-adjust by falling more than the dilution factor.

'After the ex-date, it becomes a real wildcard and nobody knows what can happen,' he said.

Other than bonus shares, companies have other options to boost liquidity. Many firms have taken on a second listing in Hong Kong or elsewhere to boost trade volumes and valuations.

One example is China Fishery, which has decided to list its stock in Oslo, a major exchange for fishery companies like itself.

This article was first published in The Straits Times.