Abstract
This study investigates delisting avoidance on an exchange as a motivation for reverse stock splits. I examine the different motivations for reverse splits for stocks at different pre-split price levels by dividing the sample into two groups, below or equal to $2, and above $2. Using a control sample of firms receiving delisting warnings, I find that firms on the brink of delisting, use reverse splits to extend exchange listing time. For firms with a pre-split price above $2, I find that liquidity enhancement may be the motivation for reverse splits.
Highlights
A reverse stock split is a reduction in a firm’s number of shares outstanding with a proportionate increase in stock price
Panel A shows a frequency of the reverse splits for each reverse split factor (RSF) range
This study investigates the motivation for reverse splits and examines changes in return volatility, liquidity, and transaction costs following reverse splits
Summary
A reverse stock split is a reduction in a firm’s number of shares outstanding with a proportionate increase in stock price. I find that for reverse splits with a pre-split price above $2, there is a decrease in trading costs following the event. For firms with a pre-split price equal to or below $2, I observe an increase in trading costs. I investigate whether survival, defined as delisting prevention, may be a motivation for reverse splits for firms with a pre-split price below $2. Using daily dollar trading volume as a proxy for liquidity, I investigate liquidity changes following reverse splits. This is the first study to use dollar trading volume to measure liquidity around stock splits. The dollar trading volume measure allows us to compare pre- and post-split liquidity directly without adjustment for change in postsplit number of shares outstanding.
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