12 Pages Posted: 12 Apr 2010
One explanation offered for stock splits is that the split signals positive information by reducing the stock price range in expectation of improved future prospects. Price declines also lead to changes in stock price dynamics, but related securities are not subject to these other changes and therefore can be used to provide a separate assessment of the markets’ interpretation of the split. We examine corporate bond issues around stock splits and find a significant decline in the bond yield spread following stock splits, supporting the signaling hypothesis. We also confirm improvements in forecasted and realized earnings subsequent to stock splits.
Suggested Citation: Suggested Citation
Michayluk, David and Zhao, Ruoyun, Stock Splits and Bond Yields: Isolating the Signaling Hypothesis. Financial Review, Vol. 45, Issue 2, pp. 375-386, May 2010. Available at SSRN: https://ssrn.com/abstract=1587109 or http://dx.doi.org/10.1111/j.1540-6288.2010.00252.x
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