Earnings Management and Post-Split Drift

38 Pages Posted: 24 Sep 2013 Last revised: 15 Feb 2019

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Fengfei Li

Deakin University - Faculty of Business and Law

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: January 21, 2019

Abstract

This paper explores whether firms manage their earnings after stock splits to meet the raised expectations from the market due to the positive signal sent by the splits. We first document that post-split drift mainly exists in the first three months and is positively associated with post-split standardized unexpected earnings (SUE). However, the higher post-split SUE of split firms is associated with higher discretionary accruals and abnormally lower R&D expenses. This result is consistent with our hypothesis that split firms overstate their post-split earnings by manipulating accruals and reducing R&D spending. Moreover, post-split abnormal returns increase with discretionary accruals and R&D reduction for about six months and tend to reverse over longer horizons, especially for firms with negative pre-split SUE. Overall, our results indicate that the post-split drift is a short-term phenomenon and partly attributable to the earnings management after the splits.

Keywords: earnings management, stock split, earnings surprise, post-split drift

JEL Classification: G12, G14, G30

Suggested Citation

Chan, Konan and Li, Fengfei and Lin, Tse-Chun, Earnings Management and Post-Split Drift (January 21, 2019). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2329740 or http://dx.doi.org/10.2139/ssrn.2329740

Konan Chan

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

Fengfei Li

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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