Do Stock Splits Signal Future Profitability?
Alabama State University - Department of Accounting and Finance
Mississippi State University - Department of Finance and Economics
Shippensburg University - Department of Finance and Management Information & Analysis
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.
Number of Pages in PDF File: 35
Keywords: Stock Splits, Signaling, Earnings
JEL Classification: G301
Date posted: September 17, 2002