Market Reactions to Stock Splits: Experimental Evidence

34 Pages Posted: 25 Feb 2021

See all articles by John Duffy

John Duffy

University of California, Irvine

Jean Paul Rabanal

Monash University

Olga Rud

RMIT

Date Written: February 22, 2021

Abstract

We report on an experiment studying how traders react to stock splits and reverse splits. In the first environment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other is not. In the second environment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other is not. We find that share prices do not fully adjust to changes in fundamental values per share in the aftermath of both splits and we relate this phenomenon to difficulties with proportional thinking.

Keywords: Stock splits, behavioral finance, proportional thinking, cognitive reflection, experimental finance

JEL Classification: G02, G12, C91, C92

Suggested Citation

Duffy, John and Rabanal, Jean Paul and Rud, Olga, Market Reactions to Stock Splits: Experimental Evidence (February 22, 2021). Available at SSRN: https://ssrn.com/abstract=3790362 or http://dx.doi.org/10.2139/ssrn.3790362

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Jean Paul Rabanal

Monash University ( email )

Melbourne
Australia

Olga Rud (Contact Author)

RMIT ( email )

124 La Trobe Street
Melbourne, 3000
Australia

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