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
Date Written: May 10, 2018
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: Suggested Citation