The Market Reaction to Stock Split Announcements: Earnings Information After All
Columbia Business School - Accounting, Business Law & Taxation
University of Illinois at Urbana-Champaign
May 10, 2014
We re-examine whether the abnormal returns around stock split announcements can be explained by an information hypothesis. Our evidence establishes a link between the abnormal returns and future earnings growth. Analysts revise earnings forecasts by 2.2-2.5% around split announcements, and this revision is significantly larger than that for matched firms. We further show that the earnings information in a split likely arises from the fact that splitting firms experience less mean reversion in their earnings growth relative to matched firms. Consistent with an earnings information hypothesis, the analyst revision and the abnormal returns are stronger for firms with more opaque information environments, and the cross-sectional variation in analyst revisions is related to the variation in abnormal returns.
Number of Pages in PDF File: 39
Keywords: Stock splits, event study, analysts, earnings estimates, information
JEL Classification: G10, G14, G3working papers series
Date posted: November 7, 2007 ; Last revised: September 19, 2014
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