Normal and reverse stock splits in the V4 countries

Manuela Raisová,Martin Užík ,Christian M Hoffmeister

doi:10.21511/imfi.13(4).2016.08

Manuela Raisová, Martin Užík + Show 1 more

Open Access

https://doi.org/10.21511/imfi.13(4).2016.08

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Abstract

The economic crisis has forced managers of joint stock companies to look for short-term solutions for the sharp changes in stock prices of their companies. Even the companies of the V4 countries are not the exception. The authors have focused on those companies where have been used either reverse stock split or stock split. They analyzed the effects of the reverse stock split or stock splits on the abnormal returns of stocks. In this paper, the authors analyzed a dataset from 1993 until 2015 with 124 reverse stock splits and 184 stock splits in total focused on the stock market in V4. Based on their own research they conclude that when reverse stock splits were used stock returns significantly decreased one day around the announcement date. They conclude that managers of a company might use this instrument to move the stock price back to the optimal trading range outside of the penny stock area. In the case of stock splits, the authors concluded that the use of this tool results in a significant increase in the returns of a stock after the announcement date. However, the results are in contrast to some former studies which found no positive effect on the returns caused by stock splits. The authors conclude that managers of a company might use this instrument to transport information content of future (positive) performance of a company to the traders. Keywords: Vysegrad group countries, normal stock split, reverse stock split, abnormal returns. JEL Classification: G11, G23, G32

Highlights

The economic crisis over the years has revealed several problems (Wyplosz, 2010)
As with normal stock splits, here we focus on the analysis of the impact of using this tool to create abnormal return
Visible is the increase in 1996 and 2007, which can be explained by the bullish markets and good economic development in the Euro zone, where many companies split their stocks

Summary

Introduction

The economic crisis over the years has revealed several problems (Wyplosz, 2010). In terms of the macro level, it is primarily a problem of growth of government debt (Sau, 2015; Escudero, 2015), inefficiencies in production and instability in the financial system of the country. As reported by Kiang et al (2009), after the bursting tech bubble in 2000, the stock prices of many companies have declined This was one of the reasons why many companies used the reverse stock split as a tool through which they tried to re-establish the trust of its shareholders and attract new investors (Kiang et al, 2009) As reported by Chung and Yang (2015), research has confirmed that investors investing in stocks of private companies prefer holdings of shares with a higher share price and greater market capitalization, with stable payout policy, with better management actions and a higher pay-for-performnace sensitivity (Chung – Yang, 2015). Studies from the USA, like they are described in the paper of Fama et al (1969), are not applicable one-to-one to the German capital market. The hypotheses of the US literature, can be adapted basically to the research of stock splits on the German capital market (Harrison, 2000)

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