Reverse Stock Splits Research Articles

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.

Analysing the Likelihood of and Market Reaction to Reverse Stock Splits in India

The study analysed the factors that motivated Indian companies to pursue reverse stock splits strategy. The article also aimed at examining the market reaction around the announcement and effective dates of reverse stock splits. Analysing the reverse stock splits pursued by Indian companies during the period 2002–2022, it was found that poor growth opportunities in the past were the main reasons for Indian companies pursuing reverse stock splits. Further, reverse stock splits were chosen by the companies whose stocks were trading as penny stocks, in the pre-split period. Here, the motivation was to improve the image of their stocks amongst the institutional investors. Realizing these value-improving motives on part of the companies adopting reverse stock splits, the market participants reacted positively to the news of reverse stock splits on the announcement as well as the effective date. Thus, the study supported positive signalling theory and image improvement theory as the rationales for Indian companies pursuing reverse stock splits and the resultant positive market reaction.

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.

Reverse stock splits effects on the liquidity of European stocks

Purpose: It is common that firms listed at undesirably low prices perform reverse stock splits to increase prices while decreasing the number of shares outstanding. In addition to these impacts, it is important to understand whether this operation has any side effects on the liquidity, as this is a fundamental element for the proper functioning of the financial markets. Therefore, our main goal is to analyze the effect that reverse stock splits have on the liquidity of European stocks. Methodology: To analyze the effect on the liquidity of the 30 firms, members of the STOXX Europe 600 index, which performed the 35 reverse stock splits identified between January 1, 2015, and December 31, 2019, we use the event study methodology and parametric and non-parametric tests. The analysis is done with a short-term (1 month) and a medium-term (6 months) event windows and to measure liquidity we use the turnover ratio and Liu’s (2006) LMx measure. Findings: In the short-term analysis, reverse stock splits contribute to increasing firms’ stock liquidity. In the medium-term analysis, it is not possible to draw a clear conclusion on the effects of reverse stock split on stock liquidity. Practical implications: The results have important implications for investors wishing to acquire shares in firms on the verge of executing this operation, as it clarifies the behavior of liquidity after the reverse stock split, which may influence their investment decision. They also contribute to helping the boards of directors of listed firms in the decision-making process. Originality/value: This work contributes to the financial literature on the relationship between reverse stock splits and liquidity, and to a better knowledge of European markets. Keywords: reverse stock splits, liquidity, Europe.

Squeeze Out of Minority Shareholders by Way of a Reverse Stock Split

상법은 주식분할과 달리 주식병합에 관한 일반규정을 두고 있지 않고, 자본금감소 등 특정한 경우에 한하여 주식병합을 허용하고 있다. 이러한 입법태도로 인해 법률이 허용하는 경우 이외에 기타의 목적으로, 특히 소수주주 축출 목적으로 행해지는 주식병합이 허용되는지 여부가 논란이 된다. 상법개정을 통해 소수주주의 주식에 대한 지배주주의 강제매수제도(상법 제360조의24)가 도입되어 소수주주 축출을 위한 일반적인 수단이 제공되고 있기때문에 주식병합을 통한 소수주주 축출이 허용되는지 더욱 논쟁의 대상이 된다. 대법원 2020. 11. 26. 선고 2018다283315 판결은 주식병합을 통한 소수주주 축출을 정면으로 다룬 판례이다. 이 판례는 주식병합을 통한 소수주주 축출이 허용된다는 전제하에서, 주식병합 과정을 주주평등의 원칙, 권리남용금지 및 신의성실의 원칙과 단주 발생으로 인해 축출된 주주에 대한 공정한 보상이라는 기준으로 검토하였다. 대법원은 주식병합으로 인한 주주축출이라는 결과가 발생하여도 주식병합이 상술한 기준을 충족하고 있으므로 적법하다고 보았다. 이러한 판례의 결론은 아래와 같은 이유에서 아쉬운 결론이라는 평가를 받을 수밖에 없다. 첫째, 대법원은 소수주주 보호라는 중요한 기능을 수행하는 주주평등의 원칙을 협소하게 형식적 평등의 관점에서만 파악하여 과도한 주식병합 비율이라도 모든 주주에게 공통되면 주주평등의 원칙에 반하지 않는다고 보아 대주주 이외의 소수주주만 주주 지위를 상실하게 되는 실질적 불평등 문제를 도외시하였다. 둘째, 주식병합을 통한 자본금감소라는 회사의 이익과 주식병합으로 인해 단주가 발생함으로 인해 침해되는 소수주주의 이익(주주 지위 유지라는 이익) 사이의 불균형이 현저하고, 명목상 목적인 자본금감소보다는 소수주주 축출이란 주된 목적이 객관적으로 인정되어 회사의 가해 목적도 분명하므로 권리남용의 요건을 충족한다. 주식병합 시 특별한 사정이 없으면 주주의 이익에 대한 침해가 최소화되도록 배려하여야 하는 신의 성실의무에 대한 회사의 위반도 과도한 병합비율로 인해 인정된다. 셋째, 현행법상 단주 처리 절차는 단주 주주에 대한 공정한 보상을 보장하지 못한다. 따라서 주식병합을 통한 단주의 발생을 제한 없이 허용하고 사후적인 보상을 통해 소수주주의 이익을 보호하는 방법은 단주에 대한 공정한 보상이 보장되지 않는 상태에서는 바람직하지 않다. 넷째, 소수주주 축출은 법이 인정한 예외적인 경우에 한하여 합리적인 범위 내에서만 허용되며, 소수주주 축출을 위해서는 원칙적으로 상법이 도입한 주식강제매수제도를 이용하여야 하고, 이를 우회하기 위해서 행해지는 주식병합을 통한 소수주주 축출은 원칙적으로 허용되지 않는다고 보아야 한다. 다섯째, 주식병합을 통한 소수주주 축출이 예외적으로 정당화되기 위해서는 경영상 목적이 있어야 하고, 그러한 주식병합이 경영상 목적 달성에 필요하며, 적합하고, 비례적이어야 한다.

Stock splits and retail trading

AbstractWe analyze retail trading around both forward and reverse stock splits. While some suggest stock splits align prices in an optimal range, which results in disperse ownership with more persistent retail investor participation, Minnick and Raman suggest that the lack of retail trader participation mitigates the use of splits to align prices in an optimal range and contributes to decreased use of stock splits. We determine if stock splits still attract more retail trading as suggested by the optimal price range hypothesis. Our results suggest stock splits are not a “one size fits all” method for attracting retail traders. Whether retail trading is transitory or permanent for forward and reverse stock splits is dependent upon price.

Further evidence on long-run abnormal returns after corporate events

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.

On Disappearing Long-Run Abnormal Returns After Major Corporate Events

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.

ANALISA FAKTOR-FAKTOR YANG MEMPENGARUHI DIVIDEND PAYOUT RATIO (Studi Empiris pada Perusahaan Manufaktur yang terdaftar di BEI 2015-2017)

Abstract- The objective of the research is to obtain empirical evidence of the effect of Return on Assets, Current Ratio, Debt to Equity Ratio, and Managerial Ownership towards Dividend Payout Ratio. Companies need to know any factors to determine the optimal dividend policy. The sample in this research is selected by using purposive sampling method and the secondary data used in this research was analyzed by using multiple regression method. The total amount of sample in this research is 13 firms which is registered as manufacturing sector in BEI for the year 2015-2017; published financial reports using Rupiah currency; audited by independent auditor; published financial reports for January 1 until December 31 periods, have positive net income, declared cash dividend, did not do stock split/ reverse stock split; and have managerial ownership on shareholders structure. The result of this research are Return on Assets, Current Ratio, Debt to Equity Ratio, and Managerial Ownership simultaneously has significant effect towards Dividend Payout Ratio. Partially, variable Return on Assets, and Managerial Ownership have positive significant effect on Dividend Payout Ratio. While Current Ratio and Debt to Equity Ratio does not have significant effect towards Dividend Payout Ratio.

Dampak Reverse Stock Split terhadap Nilai Perusahaan yang Terdaftar di Bursa Efek Indonesia

Maximizing the firms value is one of the company’s goals in running its business. The value of a company is often affected by the share price. The stock price itself changes because of the demand and supply in the market. In making investment decisions, investors consider several factors, such as information of corporate actions. Reverse stock split is one type of corporate action. The purpose of this study is to obtain empirical evidence regarding differences of firms value before and after reverse stock split. This research was conducted at companies published on the Indonesia Stock Exchange in 2009-2018. Samples were selected using purposive sampling method so as many as 15 companies were obtained. The data analysis technique used in this study was the Wilcoxon test. The results of this study indicate there is no difference of firms value between before and after a reverse stock split.
 Keywords : Reverse Stock Split; Stock Split Down; Firms Value.

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.

Money Illusion in Asset Pricing

Nominal stock prices are arbitrary. Therefore, when evaluating how a piece of news should affect the price of a stock, rational investors should think in percentage rather than dollar terms. However, dollar price changes are ubiquitously reported and discussed. This may both cause and reflect a tendency of investors to think about the impact of news in dollar terms, leading to more extreme return responses to news for lower-priced stocks. We find a number of results consistent with such non-proportional thinking. First, lower-priced stocks have higher total volatility, idiosyncratic volatility, and market betas, after controlling flexibly for size. To identify a causal effect of price, we show that volatility increases sharply following pre-announced stock splits and drops following reverse stock splits. The returns of lower-priced stocks also respond more strongly to firm-specific news events, all else equal. The economic magnitudes are large: a doubling in a stock's nominal price is associated with a 20-30% decline in its volatility, beta, and return response to firm-specific news. These patterns are not exclusive to small, illiquid stocks; they hold even among the largest stocks. Non-proportional thinking can explain a variety of asset pricing anomalies such as long-run and short-run reversals, as well as the negative relation between past returns and volatility (i.e., the leverage effect). Our analysis also shows that the well-documented negative relation between risk (volatility or beta) and size is actually driven by nominal prices rather than fundamentals.

Analisis Abnormal Return Saham Sebelum dan Sesudah Reverse Stock Split pada Perusahaan di Bei Periode 2011-2015

A positive stock return causes investors interested and interested in investing in the company that issued the shares. Many companies do stock split to overcome the problem too low or too high stock prices. This study aims to analyze whether there are significant differences abnormal return of stock before and after conducted reverse stock split on company in BEI. The population in this study is the company that conducted reverse stock split in 2011 to 2015. Purposive sampling is the method used in sampling and obtained a number of 6 issuers meet the criteria of the sample. Tests in this study used the approach of event study and analytical techniques used to test bedaabnormal share return before and after reverse stock split is non-parametric test: wilcoxon signed rank test because the data is not normally distributed. The result obtained from this research is there is no significant difference of abnormal return of stock before and after announcement of reverse stock split. The result can be interpreted that the market does not respond to the stock split stocks. The stock split does not have information content and is not considered important information for investors.

Anchoring-Adjusted Capital Asset Pricing Model

ABSTRACTWhat happens when the capital asset pricing model is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman [1974]? The surprising finding is that adjusting the capital asset pricing model for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing anomalies. The anomalies captured in the theoretical framework include the well-known size and value effects, high alpha of low beta stocks, accruals, low volatility anomaly, momentum effect, stock splits, and reverse stock splits. The market equity premium is also larger with anchoring. This suggests that the anchoring-adjusted capital asset pricing model may provide the needed unifying structure to behavioral 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.

Differences in responses to accounting-based and market-based benchmarks – Evidence from Nasdaq

We study how managers of Nasdaq-listed firms respond to the threat of delisting due to quantitative listing deficiencies. We find that managers' responses vary by deficiency type, specifically, whether the deficiency is accounting-based (related to shareholders' equity) or market-based (related to market value or bid price). Firms with accounting-based deficiencies exhibit income-increasing discretionary accruals. In contrast, firms with market-based deficiencies do not. We also find that shareholders' equity-deficient firms respond with equity issuances and bid price-deficient firms initiate reverse stock splits. These findings suggest that firms trade off among methods to meet benchmarks based on costs and constraints. In additional analyses, we find some evidence that firms' delisting avoidance strategies succeed in delaying or avoiding regulatory delistings.

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 Stock Splits in the Biotechnology Industry: An Effectuation Approach

Using an effectuation theory lens, we study reverse stock splits in the biotech industry where significant uncertainty makes specific scenarios of success difficult to predict. We conjecture and find that, in contrast to other environments where there is less uncertainty, reverse stock splits in the biotech industry are followed by positive abnormal returns over the subsequent 1- to 12-months. Also consistent with our effectuation-based predictions, we find that these returns are positively related to the reverse split ratio, size, cash holding, and long-term debt, and negatively related to the market-to-book ratio and firm age. We also find that liquidity increases after a reverse stock split. These results suggest that the concept of effectuation theory is better suited to analyzing reverse stock splits in the biotech industry.Â

Anchoring Adjusted Capital Asset Pricing Model

An anchoring adjusted Capital Asset Pricing Model (ACAPM) is developed in which the payoff volatilities of well-established stocks are used as starting points that are adjusted to form volatility judgments about other stocks. Anchoring heuristic implies that such adjustments are typically insufficient. ACAPM converges to CAPM with correct adjustment, so CAPM is a special case of ACAPM. The model provides a unified explanation for the size, value, and momentum effects in the stock market. A key prediction of the model is that the equity premium is larger than what can be justified by market volatility. Hence, anchoring could potentially provide an explanation for the well-known equity premium puzzle. Anchoring approach predicts that stock splits are associated with positive abnormal returns and an increase in return volatility. The approach predicts that reverse stock-splits are associated with negative abnormal returns, and a fall in return volatility. Existing empirical evidence strongly supports these predictions.

The effect of reverse stock split on the Warsaw Stock Exchange

The effect of reverse stock split on the Warsaw Stock Exchange