The Market Reaction To Stock Splits Used as Dividends

Abstract

This paper investigates the market reaction to stock splits based on China’s A share companies between 2007 to 2010. I find significant positive abnormal returns around the announcement date (especially before the announcement date) as well as four to six days before the execution date of China stock splits. I also observe significant negative abnormal returns just around the execution date. The above phenomenon is relatively stable even if the selection of samples and empirical models may vary, but the degree of this phenomenon might change overtime. The cross sectional regression of the abnormal returns for the announcement date shows that the phenomenon is sensitive to the split ratio and the market, and it is not sensitive to industry, company size and cash dividends. Therefore, combining with the empirical data i have constructed a high Sharpe ratio short selling investment strategy around the execution date. Then, the article further discusses the operability of the investment strategy and its stability over time.