Reverse Splits Research Articles

Stock splits and reverse splits in the Brazilian capital market

Stock splits and reverse splits in the Brazilian capital market

Reverse Stock Splits and Liquidity in ETFs

This study aims to address a gap in the existing literature pertaining to the liquidity of exchange-traded funds (ETFs). Specifically, we examine the effect of reverse share splits on ETF liquidity. In contrast to equities, the utilization of ETFs enables the separation of signaling and liquidity considerations. Findings suggest that liquidity improves after reverse splits in both univariate and multivariate results. In the absence of delisting concerns, results support the liquidity hypothesis of stock splits.

Earnings management around reverse stock splits

AbstractUtilizing a sample of 1258 reverse stock splits from 1988 to 2019, we contrast earnings management by firms that initiate reverse splits for diverse reasons. Literature suggests that the incentives for reverse splits vary based on firms' stock price ranges. As such, we use the pre‐split and target‐price ranges to separate the sample into three groups. We find a stark difference in discretionary accruals across these groups. While previous studies have treated earnings management and reverse splits as substitutes, we hypothesize that firms at risk of delisting may employ these two mechanisms as complements. Consistent with the hypothesis, we document a strong positive association between reverse splits and post‐split discretionary accruals for firms with pre‐split prices below $1. This relationship, however, is non‐existent among the remaining two groups. Our findings have two important implications for investors: (i) firms with different motives behind reverse splits exhibit different earnings management behavior and (ii) firms that are likely facing exchange delisting use discretionary accruals in complement with reverse stock splits.

Market reactions to stock splits: Experimental evidence

Stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of a firm's stock. In this paper we report an experiment designed to better understand market reactions to stock splits and reverse splits. In one treatment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other asset is not. In a second treatment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other asset is not. We find that in both cases, share prices do not fully adjust to changes in fundamental values per share following a split announcement. We provide evidence that the incomplete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in traders' cognitive abilities.

N°199 – Reverse split hand sign in Spinal Muscular Atrophy and Hirayama disease: A comparative clinico-electrophysiological study

N°199 – Reverse split hand sign in Spinal Muscular Atrophy and Hirayama disease: A comparative clinico-electrophysiological study

Daily short selling around reverse stock splits

We examine prices and daily short selling activity around reverse stock splits using a difference-in-difference identification strategy. The results show negative returns for treatment stocks, relative to control stocks, around reverse splits. Additionally, short selling increases for treatment stocks vis-à-vis control stocks in the days after the reverse split announcements, but not before. Moreover, short selling on reverse split announcement and effective dates does not appear to contain more information about future negative returns than usual. Together, the results indicate that reverse stock splits attract short sellers’ attention, but that they are no more informed around these events than normal.

NOISE TRADING BEFORE AND AFTER REVERSE SPLITS

ABSTRACT This paper uses a trivariate structural vector autoregressive model (SVAR) to identify the effects of noise trading on returns, volatility, and volume before and after reverse splits of AIG and Citigroup. We find a persistent increase in volatility due to noise trading for many days after reverse splits, and the impact on volatility is greater after the reverse splits. We find that reverse splits attract more noise traders. Keywords noise trading, reverse splits, SVAR model

Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets

ABSTRACTWe hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.

MARKET REACTIONS ON CORPORATE ACTIONS IN GROWING AND NONGROWING ENERGY CONSUMING COMPANIES

This paper aims to analyze the market reactions on corporate actions in the form of split-up, reverse split, right issue, and mergers and acquisitions in growing and non-growing energy consuming companies in Indonesia. The market reaction is analyzed based on stock price, trading volume, and abnormal returns movements using paired sample t-tests from the results of the event study for five days before and after corporate actions in the form of split-up, reverse split, right issue, and mergers and acquisitions. The results showed that stock prices reacted positively on the split-up in growing energy consuming companies, while in non-growing energy consuming companies, stock prices did not react significantly. However, the abnormal returns of growing and non-growing energy consuming companies both showed a negative movement, while the trading volumes did not react significantly. This paper specifically analyzes the market reaction on corporate actions in growing and non-growing energy consuming companies to provide interesting insights about the different reactions given by the market to corporate actions carried out by the companies with different growth categories. Keywords: Market reaction, corporate action, split-up, reverse split, right issue, merger and acquisition JEL Classifications: D81, P48, Q35, Q42 DOI: https://doi.org/10.32479/ijeep.10737

Market Reactions to Stock Splits: Experimental Evidence

We report on an experiment studying how traders react to stock splits and reverse splits. In the first environment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other is not. In the second environment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other is not. We find that share prices do not fully adjust to changes in fundamental values per share in the aftermath of both splits and we relate this phenomenon to difficulties with proportional thinking.

PENGARUH STRUKTUR ASET, LIKUIDITAS, PROFITABILITAS, KEBIJAKAN DIVIDEN, KEPEMILIKAN SAHAM INSTITUSIONAL DAN RISIKO BISNIS TERHADAP KEBIJAKAN UTANG (STUDI EMPIRIS PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA PERIODE 2015-2017)

The purpose of this research is to obtain the empirical evidence about the effect of the asset structure, liquidity measured by current ratio, profitabilty measured by return on asset, dividend policy measured by dividend payout ratio, institutional’s ownership and business risk toward debt policy. The sample in this research was selected using purposive sampling method and the secondary used in this research was analyzed using multiple regression method. The total amount of sample in this research were 30 firms which have been registered as manufacture sector in BEI simultaneously for the year 2015-2017, published financial statements as the end of 31 December and had been audited, used Rupiah as currency, had a positive net income, payment cash dividend, did not do corporate action, specifically: share split, reverse split, right issue, and treasury share, had issues institutional’s ownership. The result of this research were (1) asset structure, liquidity, and institutional ownership have significant negative effect towards debt policy, (2) profitability has significant positive effect towards debt policy, (3) dividend policy and business risk has no significant effect towards debt policy
 
 Keywords: Asset Structure, Business Risk, Debt Policy, Dividend Policy, Institutional’s Ownership, Liquidity, Profitability

Odd-Lot Trading Activity and Nominal Stock Price

We examine the rising of odd-lot trading activity and nominal stock prices in recent years. We find that odd-lot trading activity is positively associated with nominal stock price, on both cross-sectional and time-series basis. After a stock split (reverse split), the odd-lot trading activity decreases (increases) significantly. The positive relationship between odd-lot trading activity and nominal stock price holds for both common stocks and ETFs, and for retail investor trades. For higher priced stocks, there is a higher percentage of odd-lot trades with transaction price occurring within NBBOs.

Numerosity: Forward and Reverse Stock Splits

Individuals have a tendency to fixate on large numbers and ignore other relevant information in their decision making process. The numerosity heuristic, a cognitive bias, is the first behavioral hypothesis to explain why investors prefer to receive more shares (rather than less shares) in a stock split even though the aggregate economic value is the same. For forward splits, after controlling for the positive signaling of improved earnings growth and liquidity from the split announcement, the stock price reacts positively to the larger number of shares issued. More importantly, the use of a dual class numerosity model can explain why most conventional hypotheses fail to explain the negative stock price reaction to reverse splits. Given a typical bearish outlook associated with a reverse stock split, investors’ cognitive resources have already been conditioned to derive a systematic conclusion to sell the stock at the higher price. Focusing only on large stock price numerosity, investors are incorrectly inferring a higher investment value. As the high numerosity encourages bearish investors to sell at the higher perceived investment value, the stock returns react more negatively to the higher post-reverse split price level. In both forward and reverse split cases, investors react to high numerosity.

Reverse splits in international stock markets: Reconciling the evidence on long-term returns

Do firms conducting reverse splits underperform or overperform in the long run? To resolve this question we investigate the long-term returns following more than 5000 reverse splits conducted in 24 developed equity markets between the years 1990 and 2016. Using the calendar-time portfolio approach, we demonstrate that reverse splits lead to subsequent underperformance, except for microcaps in the sample. This phenomenon is present in all the global regions we examined—North America, Europe, and Asia-Pacific—and is robust to many considerations.

AKTIVITAS PERDAGANGAN SAHAM SEBELUM DAN SESUDAH PERUSAHAAN MELAKUKAN PEMECAHAN SAHAM DAN PENGGABUNGAN SAHAM DI BURSA EFEK INDONESIA TAHUN 2014-2016 (Studi Komparatif Pada Harga, Likuiditas, Volume dan Frekuensi Perdagangan Saham)

This research uses 11 day observation method 5 days before stock split / reversesplit, 1 day as observation method, and 5 days after stock split / reverse split event. Dataanalysis method used is paired sample different test. After testing the normality there are2 tests that is different test method wilcoxon signed rank test to test stock trading activityon companies doing stock split action and test method different paired sample t-test totest stock trading activity in company doing reverse split. showed no price difference,liquidity, volume and frequency of shares for companies doing reverse split action. Thisshows that stock split action does have a positive signal to attract investors, while StockLikuidity (stock split) and reverse split action are not.

Ex-Day Returns of Stock Distributions: An Anchoring Explanation

We offer a new anchoring explanation for the ex-day abnormal returns of stock distributions, including stock dividend distributions, splits, and reverse splits. We propose that investors tend to anchor on cum-day prices in valuating ex-distribution stocks, resulting in a positive association between ex-day returns and adjustment factors. We find that this positive return-factor relation exists for all three types of stock distributions and in both the pre- and post-decimalization periods. Furthermore, we find that this positive return-factor relation is more pronounced among events that are more subject to investors’ anchoring propensity, featured by less investor attention, greater arbitrage difficulty, greater valuation uncertainty, less investor sophistication, and higher market sentiment. Last, using brokerage account data, we show that stocks that are traded by investors with more investment experience demonstrate a weaker return-factor relation. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2843 . This paper was accepted by Lauren Cohen, finance.

Survival: A Motivation for Reverse Stock Splits

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.

Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets

Security trading now fragments into more than ten almost identical stock exchanges in the United States. We show that discrete pricing is one economic force that prevents the consolidation of trading volume. The uniform one-cent tick size (minimum price variation), imposed by the SEC's Rule 612, leads to more dispersed trading for lower priced securities. When a security reverse splits, its price increases and relative tick size (one cent divided by the price) decreases. We find that reverse splits consolidate trading of securities, using securities with identical underlying fundamentals that do not reverse split as the control group.

Normal and reverse stock splits in the V4 countries

The economic crisis has forced managers of joint stock companies to look for short-term solutions for the sharp changes in stock prices of their companies. Even the companies of the V4 countries are not the exception. The authors have focused on those companies where have been used either reverse stock split or stock split. They analyzed the effects of the reverse stock split or stock splits on the abnormal returns of stocks. In this paper, the authors analyzed a dataset from 1993 until 2015 with 124 reverse stock splits and 184 stock splits in total focused on the stock market in V4. Based on their own research they conclude that when reverse stock splits were used stock returns significantly decreased one day around the announcement date. They conclude that managers of a company might use this instrument to move the stock price back to the optimal trading range outside of the penny stock area. In the case of stock splits, the authors concluded that the use of this tool results in a significant increase in the returns of a stock after the announcement date. However, the results are in contrast to some former studies which found no positive effect on the returns caused by stock splits. The authors conclude that managers of a company might use this instrument to transport information content of future (positive) performance of a company to the traders. Keywords: Vysegrad group countries, normal stock split, reverse stock split, abnormal returns. JEL Classification: G11, G23, G32

Reverse Splits in International Stock Markets: Reconciling the Evidence on Long-Term Returns

The present study investigated the long-run returns following over 5,000 reverse splits conducted in 24 developed equity markets within years 1990–2016. Using the calendar-time portfolio approach, we proved that firms consolidating their stocks significantly underperformed over the 18 months following the event. This phenomenon was present in all of the global regions we examined — North America, Europe, and Asia-Pacific — and it was robust to many considerations. Any apparent overperformance was driven solely by micro-caps that were strongly represented among the companies carrying out reverse splits. Furthermore, the abnormal returns following share consolidations were not correlated among various international markets.