An examination of the survivability of reverse stock splits

Abstract

Purpose– The purpose of this paper is to examine the survivability of 810 reverse splits during the 1995-2006 period and show that companies that undertake reverse stock splits often fail within a relatively short time following the split.Design/methodology/approach– Applying both a logit model and an adapted version of the Hensleret al.(1997) accelerated failure time model to 810 reverse splits during the 1995-2006 period, the authors are the first to study the survivability of reverse split companies.Findings– The paper finds that the market reaction to the reverse split on the ex-date is an important predictor of the likelihood of survival and of survival time. The paper finds that the likelihood of survival also depends on firm size, pre-split firm returns, and the post-split share price level. The paper finds that post-split survival time also depends on firm size, pre-split operating performance as measured by return on assets, pre-split firm returns, leverage, and the post-split share price level.Practical implications– The study may be of interest to investors considering investing in stocks that have undergone reverse splits.Originality/value– The research sheds light on which reverse splitting firms are most likely to survive and for how long.