Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-05T16:42:12.546Z Has data issue: false hasContentIssue false
  • English
  • Français

What Do Stock Splits Really Signal?

Published online by Cambridge University Press:  06 April 2009

David L. Ikenberry ,
Graeme Rankine  and
Earl K. Stice
David L. Ikenberry
Affiliation:
Jones Graduate School of Administration, Rice University, Houston, TX 77005
Graeme Rankine
Affiliation:
American Graduate School of International Management, Glendale, AZ 85306
Earl K. Stice
Affiliation:
Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Get access Rights & Permissions [Opens in a new window]

Abstract

We observe significant post-split excess returns of 7.93 percent in the first year and 12.15 percent in the first three years for a sample of 1,275 two-for-one stock splits. These excess returns follow an announcement return of 3.38 percent, indicating that the market underreacts to split announcements. The evidence suggests that splits realign prices to a lower trading range, but managers self-select by conditioning the decision to split on expected future performance. Presplit runup and post-split excess returns are inversely related, indicating that our results are not caused by momentum.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 3 , September 1996 , pp. 357 - 375
Copyright
Copyright © School of Business Administration, University of Washington 1996

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A.; Jaffe, J. F.; and Mandelker, G. N.. “The Post-Merger Performance of Acquiring Firms in Acquisitions: A Reexamination of an Anomaly.” Journal of Finance, 47 (09 1992), 1605–1621.Google Scholar
Angel, J. J. “Tick Size, Share Prices, and Stock Splits.” Unpubl. Manuscript FINC 1377–11–694, Georgetown Univ. (1994).Google Scholar
Anshuman, V. R., and Kalay, A.. “A Positive Theory of Stock Splits.” Unpubl. Manuscript, Boston College (1993).Google Scholar
Asquith, P.; Healy, P.; and Palepu, K.. “Earnings and Stock Splits.” The Accounting Review, 64 (07 1989), 387–403.Google Scholar
Baker, H. K., and Gallagher, P. L.. “Management's View of Stock Splits.” Financial Management, 9 (Summer 1980), 73–77.CrossRefGoogle Scholar
Baker, H. K., and Phillips, A.. “Why Companies Issue Stock Dividends.” Financial Practice and Education, 3 (Fall 1994), 29–27.Google Scholar
Banz, R. W., and Breen, W. J.. “Sample Dependent Results Using Accounting and Market Data: Some Evidence.” Journal of Finance, 41 (09 1986), 779–794.Google Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specifications of Test Statistics.” Unpubl. Manuscript, Univ. of California at Davis (1996).Google Scholar
Brennan, M. J., and Copeland, T. E.. “Stock Splits, Stock Prices, and Transaction Costs.” Journal of Financial Economics, 22 (10 1988), 83–101.CrossRefGoogle Scholar
Brennan, M. J., and Hughes, P. J.. “Stock Prices and the Supply of Information.” Journal of Finance, 46 (12 1991), 1665–1691.CrossRefGoogle Scholar
Chan, L. K. C.; Jegadeesh, N.; and Lakonishok, J.. “Momentum Strategies.” Unpubl. Manuscript, Office of Research 95–0122, Univ. of Illinois (1995).CrossRefGoogle Scholar
Conroy, R.; Harris, R.; and Benet, B.. “The Effects of Stock Splits on Bid-Ask Spreads.” Journal of Finance, 65 (09 1990), 1285–1295.Google Scholar
Copeland, T. “Liquidity Changes following Stock Splits.” Journal of Finance, 34 (03 1979), 115–141.CrossRefGoogle Scholar
Cusatis, P. J.; Miles, J. A.; and Woolridge, J. R.. “Restructuring through Spinoffs: The Stock Market Evidence.” Journal of Financial Economics, 33 (06 1993), 293–311.CrossRefGoogle Scholar
Desai, H., and Jain, P. C.. “Dividend Signaling and Common Stock Returns following Stock Splits and Reverse Splits.” Unpubl. Manuscript, Tulane Univ. (1995).Google Scholar
Dharan, B. G., and Ikenberry, D.. “The Long-Run Negative Drift of Post-Listing Stock Returns.” Journal of Finance, 50 (12 1995), 1547–1574.Google Scholar
Fama, E.; Fisher, L.; Jensen, M.; and Roll, R.. “The Adjustment of Stock Prices to New Information.” International Economic Review, 10 (02 1969), 1–21.CrossRefGoogle Scholar
Grinblatt, M. S.; Masulis, R. W.; and Titman, S.. “The Valuation Effects of Stock Splits and Stock Dividends.” Journal of Financial Economics, 13 (12 1984), 461–490.CrossRefGoogle Scholar
Haugen, R. A.The New Finance: The Case Against Efficient Markets. Englewood Cliffs, NJ: Prentice Hall (1995).Google Scholar
Ikenberry, D., and Lakonishok, J.. “Corporate Governance through the Proxy Contest: Evidence and Implications.” Journal of Business, 66 (07 1993), 405–435.CrossRefGoogle Scholar
Ikenberry, D., Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Stock Repurchases.” Journal of Financial Economics, 39 (10 1995), 181–208.CrossRefGoogle Scholar
Koski, J. “Measurement Effects and the Variance of Returns after Stock Splits and Stock Dividends.” Unpubl. Manuscript, Univ. of Washington (1995).Google Scholar
Kothari, S. P., and Warner, J. B.. “Measuring Long-Horizon Security Price Performance.” Unpubl. Manuscript, Bradley Policy Research Center FR 95–19, Univ. of Rochester (1995).Google Scholar
Lakonishok, J., and Lev, B.. “Stock Splits and Stock Dividends: Why, Who, and When.” Journal of Finance, 62 (09 1987), 913–932.CrossRefGoogle Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R. W.. “Contrarian Investing, Extrapolation and Risk.” Journal of Finance, 49 (12 1994), 1541–1578.CrossRefGoogle Scholar
Lamoureux, C., and Poon, P.. “The Market Reaction to Stock Splits.” Journal of Finance, 62 (12 1987), 1347–1370.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (03 1995), 23–51.CrossRefGoogle Scholar
Maloney, M., and Mulherin, J.. “The Effects of Splitting on the Ex: A Microstructure Reconciliation.” Financial Management, 21 (Winter 1992), 44–59.CrossRefGoogle Scholar
McNichols, M., and Dravid, A.. “Stock Dividends, Stock Splits, and Signaling.” Journal of Finance, 45 (07 1990), 857–879.CrossRefGoogle Scholar
Michaely, R.; Thaler, R. H.; and Womack, K. L.. “Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?” Journal of Finance, 50 (06 1995), 573–608.CrossRefGoogle Scholar
Ohlson, J., and Penman, S.. “Volatility Increases Subsequent to Stock Splits: An Empirical Aberration.” Journal of Financial Economics, 14 (06 1985), 251–266.CrossRefGoogle Scholar
Ritter, J. R. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (03 1991), 1–27.Google Scholar
Spiess, D. K., and Affleck-Graves, J.. “Underperformance in Long-Run Stock Returns following Seasoned Equity Offerings.” Journal of Financial Economics, 38 (1995), 243–267.CrossRefGoogle Scholar
Szewczyk, S. H., and Tsetsekos, G. P.. “Why Stocks Split? Evidence from Institutional Ownership.” Unpubl. Manuscript, Drexel Univ. (1995).Google Scholar
Womack, K. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (03 1996), 137–167.CrossRefGoogle Scholar