Stock Split Announcements Research Articles

An Empirical Study of Stock Split Announcements of Select BSE Sectors Using Event Study Methodology

This study examines the stock market reaction to stock splits between 2002 and 2013 of 6 sectors of BSE-Auto, Bankex, Consumer Durables, FMCG, Health Care and IT sectors to find out if the Indian stock market is semi-strong efficient or not. The methodology used is event study under the market model. Samples of 14 stock splits are considered spread across 6 sectors. The results indicate that there are significant positive abnormal returns prior to split announcements. On the day of split announcement, 1 sector reacts positively (Health Care-3.3%) and the 5 react negatively (Auto -1%, Bankex -0.9%, CD -0.3%, FMCG -1%, and IT-1%). The results indicate that the null hypothesis, H<sub>0</sub>1, that there is no significant AAR around the stock split announcement dates is accepted.

The impact of regulation FD on the information environment: evidence from the stock market response to stock split announcements

This paper examines the information environment effects of regulation fair disclosure (Reg FD). We investigate the stock market response to stock splits in the pre- and post-regulation periods. We find that abnormal returns around split announcement are positive in both periods, but the magnitude of the returns is smaller in the post-FD period relative to the pre-FD period. The difference between the pre- and post-FD period abnormal returns persists even after we control for factors that may affect split announcement returns. We also find that the magnitude of the association between announcement returns and the unexpected portion of the split factor has increased post-regulation. Our analysis of performance trends for split firms reveals that patterns of profitability and changes in profitability in the years around stock splits are similar in the pre- and post-FD periods. However, we find that announcement returns are associated with lagged profitability changes in the pre-FD period, but with future profitability changes in the post-FD period. Collectively, our results imply that Reg FD has reduced information asymmetry and improved price efficiency.

Large shareholder ownership and signals : evidence from stock split announcement effects in Korea

Large shareholder ownership and signals : evidence from stock split announcement effects in Korea

The effects of stock splits on stock liquidity

This study examines the effects of stock splits on stock liquidity. We find that most liquidity measures increase substantially around the stock split announcement. After the announcement date, split firms’ liquidity declines, but is still above the pre-split level. However, after the ex-date, the liquidity drops below the pre-split level. Thus, the impact of stock splits on stock liquidity appears to be short-lived. We also find that the change in liquidity can significantly explain the announcement effect, but not the ex-date effect. Overall, our results seem to be more consistent with the signaling hypothesis and/or the attention-grabbing hypothesis than with the improved liquidity hypothesis.

Effect of Stock Split Announcement on Stock Performance of Neglected Firms from the Polish Capital Market

The intriguing phenomenon, which is a stock split, has been remaining the subject of interest for academicians as well as for practitioners. Even though stock splits per se, at least theoretically, should not alter company’s profitability or ability to generate future cash flows they have continuously attracted the attention of inter alia stock market participants since the empirical evidence documented by a number of researchers contradicts the assumption of efficient market hypothesis and provides conspicuous input data for further analysis. In spite of the algebraic simplicity this firm-specific event has induced different reactions concerning various stock characteristics observed in a variety of capital markets all over the world what, in turn, perpetuates the state of an uncovered mystery. Splitting firms are likely to rarely opt out of splitting the stock once they have announced the stock split what may ensue from the fact that split is believed to be a costly signal. Although there exist different schools of thought trying to explain the motivations behind the phenomenon of split one might presume that at least some of them assume/underline the benefits that are expected to emerge following the event. In fact, literature abounds with evidence on enhanced liquidity, increased shareholders’ base, lower volatility of stock price, advanced shareholders’ wealth or greater percentage of individual shareholders in the ownership structure. In principle, companies that decide to announce the stock split are very likely to perform the split. Among miscellaneous explanations for stock splits the signaling hypothesis proclaims that managers split the shares with the purpose of disseminating private information, in particular their positive outlook for the nearest future or, equivalently, that the current situation is viewed to be preserved over the coming quarters. At the other extreme, neglected firm hypothesis tries to explain the motivation of a stock-split-announcing firm by the fact that managers strive to attract the attention of the stock market participants since such entities are often not actively followed by financial analysts and the market at large. Moreover, the scarce information set on neglected firms perpetuates this state of affairs. Therefore, management of neglected firms decide to split the shares in order to achieve the attention-getting effect due to the fact that as opposed to other corporate events like dividend announcement the stock split comprises no formal declaration of any change except for the increased number of shares outstanding and lower nominal value of shares.I examine the research sample composed of stock-splitting companies that are rarely followed by stock market participants, i.e. neglected firms. As a proxy to identify such entities I review the interest of financial analysts that cover the companies under consideration issuing the investment recommendations. Over 90% of the research sample were not actively followed by financial analysts in the period preceding the announcement of the split what underpins the neglected-firm hypothesis as the rationale behind splitting the stock. I perform the analysis of trading liquidity measured with trading volume for the companies at issue. I observe a diminution in liquidity following the announcement of the stock split bill what contradicts the assumptions of liquidity and/or trading range hypotheses and is likely to imply increased transaction cost for existing and prospective shareholders when trading in the splitting stock. Furthermore, I inspect the abnormal stock performance that accompanies stock split bills announced between 2000 and 2010 by neglected firms from the Polish capital market. I document stock price and abnormal returns upswing following the announcement that lasts for few trading sessions thereafter. I report that after a short-lived rebound in abnormal returns surrounding the announcement date stock-splitting companies experience deterioration in shareholders’ wealth over the two months following the announcement, therefore signaling hypothesis appears to explain the results obtained to small extent. The results indicate that market participants do not interpret pending stock split as a positive signal.

Stock Market Reactions to the Announcements and Executions of Stock-Splits and Reverse Stock-Split

Summary The aim of this paper is to analyze the stock market investors reactions to the events of announcement and execution of stock-splits and reverse stock-splits carried out on Warsaw Stock Exchange (WSE) during the period 2004-2012. The study puts the emphasis on the differences between market reactions to standard stock-splits and reverse stock-splits. The results presented in this paper are based on the methodology of event study. The studied data sample consists of 45 instances of stock-splits and 6 instances of reverse stock-splits that took place on WSE in the specified period of time. Results obtained suggest no statistically significant reaction to the events of: split announcement, split execution and reverse split execution and a statistically significant (mostly negative) reaction to the event of reverse split announcement. Although some anomalies can be observed on close inspection of the data, in general the obtained results can be interpreted as evidence of investors' rationality with regards to events connected with stock-splits on the WSE.

A Real Determinant of Stock Split Announcements

A Real Determinant of Stock Split Announcements

Analyst coverage and market reaction around stock split announcements

This study examines the influence of the number of financial analysts following a firm on market reaction around the announcement of stock splits. Results show that the raw as well as abnormal returns at the announcement of stock splits are negatively related to the level of analyst coverage. The negative relation prevails even after controlling for size, book-to-market, momentum, split factors and post-split target price. Moreover, the impact of analyst coverage on market reaction is stronger for a sample of small size stocks than a sample of large stocks. The findings of this article suggest that information asymmetry is an important factor influencing market reaction to stock split announcements.

Managerial Incentives and Strategic Use of Information

This paper studies how managerial incentives determine strategic transfer of information from managers to investors. We argue that: first, standard managerial contracts induce CEOs to engage in cheap talk (i.e. costless information disclosure); second, the more variable compensation (bonuses, shares and stock options) CEO has, the more likely she/he will engage in cheap talk. Lastly, we hypothesize that CEOs who engage in cheap talk are more likely to be fired following the period of low stock market returns.By examining 1992-2008 data on managerial remuneration and turnover we find out that actual managerial contracts do indeed incentivize executives to attract analyst attention through mechanisms like stock split announcements. In particular, it turns out that a 10% increase in the share of managerial variable compensation increases the probability of split announcement by 3.95%. Furthermore, we find out that CEOs get punished for an improper use of cheap talk.

Insider Trading Around Stock Split Announcements

This research examines the trading behavior and motives of corporate insiders around announcements of firms' stock splits. Our empirical analyses document significant increases in insider sales prior to the announcement. Further, pre-announcement insider sales are found to be positively related to pre-announcement-period abnormal returns. These findings suggest that insider trading before stock split announcements is motivated mainly by portfolio diversification needs rather than by the information content of the announcements.

Signaling Via Stock Splits: Evidence from Short Interest

We test the split signaling hypothesis by studying sophisticated investors’ reaction to stock split announcements. Return-based tests of signaling used in earlier studies produce conflicting results and have been recently criticized as unreliable. We bypass this criticism by focusing on longterm post-split behavior of short sellers who are generally recognized as sophisticated investors. Upon controlling for alternative hypotheses and conventional short selling determinants, we show that short interest permanently declines in reaction to split announcements. Furthermore, consistent with signaling, the degree of the decline is positively related to signal strength and to the splitter’s level of information asymmetry. Overall, our results are consistent with the view that firms use stock splits to relay positive value-relevant signals.

Effect of Investor Sentiment on Market Response to Stock Split Announcement*

AbstractThis paper creates monthly investor sentiment indices for Korea and provides evidence that these indices have the power to predict the subsequent 6‐month buy‐and‐hold returns. In addition, the paper shows that investor sentiment positively affects market response to stock split announcements by using stock splits on the Korea Exchange from 1999 to 2006. First, market response to a stock split announcement is positively related to investor sentiment. Second, market response is more pronounced in high sentiment periods, particularly for small, young, highly volatile, and low profit‐stocks, the valuations of which are highly subjective and difficult to arbitrage. Third, the initial effects of size, age, volatility, and profitability in times of high investor sentiment tend to be reversed over 12‐month post‐split performance. These empirical results imply that the market tends to overreact to stock split announcements for small, young, highly volatile, and low‐profit firms in a high sentiment period but thereafter correct the overvaluation of those firms during the 12‐month post‐split performance. As such, the paper shows how investor sentiment affects the valuation of stocks at a corporate event level.

Are CEOs Incentivized to Split Their Stocks?

We provide evidence that the decision to split a firms’ stock is related to CEO compensation. Previous works document that, on average, stock splits lead to price increases and increased price volatility in the year following the split. We use the delta and vega of the CEO’s compensation package to measure CEO sensitivity to changes in the firm's stock price and changes in stock volatility, respectively. For a large sample of splits spanning 1992 to 2005, we find that higher delta and vega compensation is associated with a higher propensity to undertake a stock split. These findings are robust to other documented motivations for stocks splits, including the trading range, signaling, and tick size explanations. In addition, we find that vega is related to the magnitude of the stock split. Given that larger split factors are related to larger increases in volatility these findings confirm the importance of managerial incentives in determining stock split factors. Lastly, a large proportion of CEO option grants are made during the two days preceding and on the day of the stock split announcement. Overall, our findings suggest that managers can increase the risk profile (i.e. volatility) of the firm by cosmetically changing the firm (i.e. splitting the shares), and are induced to do so through the composition of their compensation packages.

News and noise: do investors react to stock split announcements differently during periods of high and low market volatility?

In this paper, we find evidence that stock split announcements have a greater wealth effect when market volatility, as measured by the VIX index, is low. This effect is driven primarily by small firms. These results support the hypothesis that when market volatility is high, signals sent by small firms are more likely to be obscured by noise than when market volatility is low.

Stock Splits, a Survey

In this survey paper I summarize the literature's findings on the short-run and long-run effects of stock split announcements as well as what happens in the preceding and subsequent years around a stock split event. I also summarize how firm characteristics influence these results. Furthermore, I discuss the various theories regarding why splits occur and why stock return distributions change subsequent to split events. I specifically focus on the changes in the first and second moments of stock returns and analyze related theories such as optimal trading, optimal tick size, liquidity, and signaling. More importantly I present the pros and cons of each of these theories and discuss which of them are more plausible. I suggest that a combination of the several theories suggested in the literature can rationally explain the return distribution changes around stock splits. I conclude with suggestions for future research.

KANDUNGAN INFORMASI PADA PENGUMUMAN REVERSE STOCK SPLIT

The objective of this study is to investigate whether market reacts to reverse stock split announcement. If market reacts to the announcement therefore the announcement has information content and vice versa. Reverse stock split is an interesting issue regarding financial policies. The study uses companies listed in Jakarta Stock Exchange (JSX) announcing reverse stock split. The research uses data from 2001 to 2007, because several companies informs reverse stock split to the market during the period. This study expects that the announcement have a market reaction. The result of this study is market reacts to the announcement. Therefore, the announcement of reverse stock split has information content.

Stock Splits, Signalling and Liquidity

This paper examines the impact of stock splits announcements in Australia for the period 1991 to 2008. Market reacts positively to the announcement of stock splits. Price reactions are positively related to split factor, idiosyncratic risk and book to market ratio, and negatively related to market capitalization, pre split price, post split price, and long term debt ratio. Split factor is positively related to the price prior to the announcement, stock price run-up, proportionate bid-ask spread for the year prior to the announcement, and idiosyncratic risk. Reduction in proportionate bid-ask spread is positively related to split factor and negatively related to the price prior to the announcement. Overall, our results provide some support for signaling and liquidity hypotheses.

Intra‐Industry Effects of Stock Splits: Focus on Insurance Companies

This paper examines the intra‐industry effects of 120 stock split announcements within the insurance industry between 1985 and 2006. Our results of the valuation effects are suggestive of dominant competitive effects for stock splits by insurance companies, especially life insurers, thus indicating possible changes in the competitive balance of the industry. The results of our cross‐sectional analyses suggest that for non‐splitting firms with a high concentration of competition the industry effects are less favorable. Industry effects are more favorable when the valuation effects of the splitting firms are more favorable, when the splitting firms are larger, and when the non‐splitting firms are more similar to the splitting firm. Overall, our results show that both industry‐wide and firm‐specific characteristics are important to explain the cross‐sectional variation in the intra‐industry effects, and that competitive effects and contagion effects are not entirely mutually exclusive.

Stock Return Behaviour around Stock Splits: Indian Evidences

Present study examines the stock return behaviour vis-à-vis stock splits in Indian context during the period from December 1999 to December 2007. It also makes an effort to disentangle the liquidity, trading range and neglected firm hypothesis. Consistent to earlier evidence, the study also documents the stock split announcement and execution effect in Indian context. The results regarding trading volume and daily turnover led to negation of improvement in liquidity after stock splits in India. The study could not corroborate the trading range hypothesis as possible explanation of stocks splits in India as majority of shares which split were trading at low market prices. While the neglected firm hypothesis could firmly be associated with the stock splits in India.

Stock split size, signaling and earnings management: Evidence from the Spanish market

This study uses a sample of Spanish companies to examine the use of stock split announcements as signals of a firm's earnings performance. Our results confirm that, as in other stock markets, investors in the Spanish market upwardly revise share prices and financial analysts improve their earnings forecasts after stock split announcements. We also find that firms that announce a stock split show significantly better operating profitability in the years prior to the split than matching companies of the same size and industry; and that these relatively better profits are not the result of earnings management practices. Finally, our results suggest that only when the split factor is greater than expected will investors interpret splits as a signal of the permanent character of past earnings.