Abstract

http://ssrn.com/abstract=1027543
 
 

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The Market Reaction to Stock Split Announcements: Earnings Information After All


Alon Kalay


Columbia Business School - Accounting, Business Law & Taxation

Mathias Kronlund


University of Illinois at Urbana-Champaign

August 28, 2013


Abstract:     
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: 45

Keywords: Stock splits, event study, analysts, information, liquidity

JEL Classification: G10, G14, G3

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Date posted: November 7, 2007 ; Last revised: August 29, 2013

Suggested Citation

Kalay, Alon and Kronlund, Mathias, The Market Reaction to Stock Split Announcements: Earnings Information After All (August 28, 2013). Available at SSRN: http://ssrn.com/abstract=1027543 or http://dx.doi.org/10.2139/ssrn.1027543

Contact Information

Alon Kalay
Columbia Business School - Accounting, Business Law & Taxation ( email )
3022 Broadway
New York, NY 10027
United States

Mathias Kronlund (Contact Author)
University of Illinois at Urbana-Champaign ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
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