Abstract
AbstractThis paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (overoptimistic/opportunistic) splits precede positive (negative) long‐term buy‐and‐hold abnormal returns. Using the calendar month portfolio approach, we show that the zero‐investment, ex ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre‐split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post‐split long‐term abnormal returns.
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