The effect of market volatility and firm size towards the difference of market reaction around stock-split announcement in indonesia stock exchange

Abstract

The primary objective of a company is to increase the wealth of the shareholders. Every decision, policies or actions must be made to favor the shareholders. Corporate actions are conducted by corporations to improve their performance or increase the wealth of the shareholder. Stock split is known as one of the several corporate measures that are perceived to be a positive corporate action. Stock split creates a perception that the stock is buyable and cheap without changing its initial value. It has already been studied that positive cumulative abnormal return occurs around the stock split. However, the truth is even though the stock split is considered positive, several companies do not experience the expected result. The results of stock splits vary and are perceived differently by investors. In this paper, researcher wants to study factors that can affect the difference in investors’ reaction towards the same corporate action, which is stock split. It is believed that market volatility can cause the difference in investors’ reaction towards the same positive corporate action (stock split) as studied before. The researcher also wants to study the relation between firm sizes represented by market capitalization that might cause investors to treat the same news differently. To analyze this, the researcher will first classify the stock split result in the form of Cumulative Abnormal Return (CAR) based on the volatility of the period that the stock split is conducted in and also the firm size that performs the stock split. The researcher will use one-way ANOVA to find out if there is a statistically significant difference in market reaction towards the stock-split event based on those two classifications. The researcher found that investors do react differently towards the stocksplit event in different market volatility conditions, and it is also found that there is no difference in investors’ reaction towards stock split based on firm size. The researcher also conducts further research and found that investors react differently in different market volatility condition in firms with small and medium market capitalization. While as in firms with large market capitalization, it is found that there is no statistically significant difference in investors’ reaction towards stock splits that are conducted in various market volatility conditions.