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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
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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

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