Return Predictability: The Dual Signaling Hypothesis of Stock Splits

Forthcoming, The Financial Review

57 Pages Posted: 28 Jun 2016 Last revised: 24 Dec 2018

See all articles by Ahmed Elnahas

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

Lei Gao

George Mason University

Ghada Ismail

University of Texas Rio Grande Valley

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2016

Abstract

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns.

Suggested Citation

Elnahas, Ahmed and Gao, Lei and Ismail, Ghada, Return Predictability: The Dual Signaling Hypothesis of Stock Splits (May 16, 2016). Forthcoming, The Financial Review, Available at SSRN: https://ssrn.com/abstract=2800772 or http://dx.doi.org/10.2139/ssrn.2800772

Ahmed Elnahas (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

Lei Gao

George Mason University ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://sites.google.com/view/lei-gao/home

Ghada Ismail

University of Texas Rio Grande Valley ( email )

TX
United States

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