Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions

27 Pages Posted: 19 Jul 2007

See all articles by Shourun Guo

Shourun Guo

Duke Energy Corp.

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Weihong Song

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

We document that acquiring firms are more likely than non-acquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long-run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock-swap acquisitions (Erickson and Wang, 1999; Louis, 2004). This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.

Keywords: stock splits, mergers and acquisitions, and value manipulation

JEL Classification: G34, G39

Suggested Citation

Guo, Shourun and Liu, Mark H. and Song, Weihong, Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions (July 2007). Available at SSRN: https://ssrn.com/abstract=1001243 or http://dx.doi.org/10.2139/ssrn.1001243

Shourun Guo

Duke Energy Corp. ( email )

139 East Fourth Street
EA600
Cincinnati, OH 45202
United States

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

Weihong Song

Independent

No Address Available

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