Abstract
Stock split should not have any impact on share prices, and there should be no value creation. The purpose of this study is to find any impact of stock splits announced in India between 1999 and 2019 on stock returns. The study aims to find differences in the impact of stock splits on stock returns with differences in stock split ratios. To examine the impact, the study includes 224 splits and adopts the standard event study methodology to find results. The presence of an abnormal return around split announcement day is the main factor, which determines the impact of stock split on the stocks. Average Abnormal Returns and Cumulative Average Abnormal Returns on percentage basis, z-test and p-value are used to statistically analyze the impact on stock prices around the announcement day of splits. These tests are used across different window periods (e.g., 20 days, 10 days and 5 days) around the event day (announcement day) to check if the impact of the event continues or decreases over time. The results point to a significant positive impact of stock splits on the returns of stock around the day the split was announced. The results also show that the impact is stronger for stock splits with ratios 10:1 (2.72 percent) and 10:2 (2.14 percent). It can be suggested that 10:1 and 10:2 are the most popular split ratios that receive maximum ongoing response to splits in the announcement window.
Highlights
Stock split is a numeric change in the face value of shares that does not affect the investors’ equity ownership
The aim of this study was to investigate the impact of stock splits around the announcement day with particular emphasis on finding any differences in the impact with differences in the stock split ratios
The analysis shows that Abnormal Returns (AARs) are significantly positive on the announcement day
Summary
Stock split is a numeric change in the face value of shares that does not affect the investors’ equity ownership. Stock splits should not have any effect on share prices and should not create any value as a result. Despite theoretical simplicity, this corporate event has induced different reactions in many capital markets all over the world. The main motivation behind splits seems to be the Optimal Trading Range Hypothesis, which states that there is a price range in which trading of shares of a company is most favorable for that company. Stock split is done to maintain share prices in a favorable trading range and improve liquidity by facilitating trading of shares. If the abnormal returns are positive, it means that the market views the split as a favorable event for future of the company, and vice versa. The study examines if there are differences in the impact of split announcements with differences in the split ratio
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