Return Predictability: The Dual Signaling Hypothesis of Stock Splits

31 Pages Posted: 20 May 2020

See all articles by Ahmed Elnahas

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

Lei Gao

Iowa State University

Ghada Ismail

University of Texas Rio Grande Valley

Multiple version iconThere are 2 versions of this paper

Date Written: November 2019

Abstract

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (overoptimistic/opportunistic) splits precede positive (negative) long‐term buy‐and‐hold abnormal returns. Using the calendar month portfolio approach, we show that the zero‐investment, ex ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre‐split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post‐split long‐term abnormal returns.

Keywords: dual‐signaling hypothesis, earnings management, long‐term stock returns, stock splits

JEL Classification: G11, G12, G14, G35, M41

Suggested Citation

Elnahas, Ahmed and Gao, Lei and Ismail, Ghada, Return Predictability: The Dual Signaling Hypothesis of Stock Splits (November 2019). Financial Review, Vol. 54, Issue 4, pp. 801-831, 2019, Available at SSRN: https://ssrn.com/abstract=3601144 or http://dx.doi.org/10.1111/fire.12192

Ahmed Elnahas (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

Lei Gao

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

Ghada Ismail

University of Texas Rio Grande Valley ( email )

TX
United States

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