A Reexamination of Stock Splits Using Moving Betas

Abstract

WHEREAS THE COSTS OF STOCK SPLITS are readily apparent (e.g., stock issue taxes, listing fees, mailing costs), the benefits accruing to holders of split shares are less evident.' Several rationale for stock splits have been offered including: (1) increased of firms' shares, (2) conveyance of regarding superior investment opportunities, (3) increased ownership base to avoid mergers, (4) increased product sales, and (5) improved employer/employee relations.2 Market lore dictates that the first argument, the marketability criterion, is paramount. Its proponents maintain that stock splits, per se, benefit shareholders by increasing securities' popularity and via bringing share prices into more favorable trading ranges.3'4 The finance literature has concentrated upon the second, the information content, argument as the motivating force behind stock splits. Advocates of this position contend that stock splits only provide shareholders with lasting benefits when followed, or accompanied, by favorable financial such as superior investment opportunities expected to result in increased future earnings and cash dividends. As early as 1956, C. Austin Barker [4] examined stock splits and showed that rates of return are substantially higher to holders of split shares undergoing cash dividend increases, but not to holders of split shares not culminating in increased total cash dividends. Perhaps the best known information content study was undertaken by Fama, Fisher, Jensen, and Roll [8] (hereafter FFJR). Using the capital asset pricing model developed by Sharpe [16] and Lintner [13], FFJR confirmed Barker's earlier findings regarding the effect of cash dividend changes. To ascertain each split security's abnormal performance around the time of a split (i.e., its rate of return unaccounted for by the security's ordinary risk-return relationship vis-a-vis the market), FFJR estimated systematic risk after eliminating