The Market Reaction to Stock Splits - Evidence from Germany

Schmalenbach Business Review, Vol. 54, 2002

Posted: 15 Apr 2003

See all articles by Christian Wulff

Christian Wulff

affiliation not provided to SSRN

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Abstract

This paper investigates the market reaction to stock splits, using a set of German firms. Similar to the findings in the U.S., I find significant positive abnormal returns around both the announcement and the execution day of German stock splits. I also observe an increase in return variance and in liquidity after the ex-day. Apparently, legal restrictions strongly limit the ability of German companies to use a stock split for signaling. I find that abnormal returns around the announcement day are consistently much lower in Germany than in the U.S. Further, I find that abnormal returns around the announcement day are not related to changes in liquidity, but (negatively) to firm size, thus lending support to the neglected firm hypothesis. On the methodological side the effect of thin trading on event study results is examined. Using trade-to-trade returns increases the significance of abnormal returns, but the difference between alternative return measurement methods is relatively small in short event periods. Thus, the observed market reaction cannot be attributed to measurement problems caused by thin trading.

JEL Classification: G14

Suggested Citation

Wulff, Christian, The Market Reaction to Stock Splits - Evidence from Germany. Schmalenbach Business Review, Vol. 54, 2002. Available at SSRN: https://ssrn.com/abstract=321005

Christian Wulff (Contact Author)

affiliation not provided to SSRN

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