The Market Reaction to Stock Split Announcements: Earnings Information After All
Columbia Business School - Accounting, Business Law & Taxation
University of Illinois at Urbana-Champaign - Department of Finance
October 24, 2012
We re-examine whether the abnormal returns around stock split announcements can be explained by an information hypothesis. While recent research focuses on liquidity and catering theories, 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. Furthermore, the cross-sectional variation in analyst revisions is related to the variation in abnormal returns. We also find evidence on splitting activity and the market reaction to splits that is inconsistent with liquidity-based theories and mixed with respect to catering.
Number of Pages in PDF File: 48
Keywords: Stock splits, event study, analysts, information, liquidity
JEL Classification: G10, G14, G3working papers series
Date posted: November 7, 2007 ; Last revised: November 10, 2012
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