Do Stock Splits Signal Future Profitability?

Abstract

This study examines whether stock split announcements contain information content about future profitability, measured in terms of future earnings change, future earnings, or future abnormal earnings. Our sample includes 635 split announcements that have both a not-close-to-the-median post split share price and a low split factor. Our empirical results show little evidence that stock splits are positively related to future profitability. In fact, stock splits are in general negatively related to future profitability in subsequent years after the announcement. This negative relation holds regardless of future profitability measure. Therefore, our empirical finding suggests that stock splits are not useful signals of a firm's future earnings prospects.

Keywords: Stock Splits, Signaling, Earnings

JEL Classification: G301