True Returns: Adjusting Stock Prices for Cash Dividends and Stock Splits

Advances in Financial Education, Volume 17 (Summer), 2019, 192-205.

18 Pages Posted: 6 Apr 2019 Last revised: 27 Jul 2020

See all articles by James Felton

James Felton

Central Michigan University - Department of Finance and Law

Pawan Jain

University of Wyoming - College of Business - Department of Economics and Finance

Date Written: May 10, 2018

Abstract

Accurately calculated historical returns are critical inputs for investment decisions. We document that data vendors’ adjustments to historical prices for dividends and stock splits result in inaccurate estimations of historical returns. We demonstrate several techniques that can be used to correct the error and estimate the true returns. Our findings pose a challenge for the finance literature that derives conclusions based on the historical returns naively calculated using the adjusted closing prices provided by the data vendors.

Keywords: adjusted close, historical price, stock split, cash dividend, split-adjusted

JEL Classification: A22, G11, G12

Suggested Citation

Felton, James and Jain, Pawan, True Returns: Adjusting Stock Prices for Cash Dividends and Stock Splits (May 10, 2018). Advances in Financial Education, Volume 17 (Summer), 2019, 192-205., Available at SSRN: https://ssrn.com/abstract=3354728

James Felton (Contact Author)

Central Michigan University - Department of Finance and Law ( email )

Mount Pleasant, MI 48859
989-774-3269 (Phone)
989-774-6456 (Fax)

Pawan Jain

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

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