Why Firms Consolidate Their Stocks?

Abstract

I use event date methodology to examine the market reaction to reverse stock splits. I find that the abnormal returns around the announcement date are negative both for the whole reverse split sample and for the pure reverse split sample. I conduct a matched sample as the benchmark to valuate the performance of reverse splitting firms. Their firm performance and long run stock performance are documented worse compared with their matched firms. And the reverse splitting firms conducting a capital reduction perform even worse both in the view of announcement effect and of their firm performance. The adjusted trading volume increases considerably after reverse splits. This result partially suggests that reverse stock splits improve the liquidity of the stock. The relative tick size, which affects the transaction cost, decreases significantly after splitting. The relationship between the decision on split factor and the deviation from market-wide average stock price is not statistically significant. Therefore, the result does not support the hypothesis of 'optimal stock price range'.