Market Reactions to Stock Splits: Experimental Evidence

40 Pages Posted: 25 Feb 2021 Last revised: 16 Mar 2023

See all articles by John Duffy

John Duffy

University of California, Irvine

Jean Paul Rabanal

University of Stavanger

Olga Rud

University of Stavanger

Date Written: February 22, 2021

Abstract

Stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of a firm's stock. In this paper we report on an experiment designed to better understand market reactions to stock splits and reverse splits. In one treatment, 2 assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other asset is not. In a second treatment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other asset is not. We find that in both cases, share prices do not fully adjust to changes in fundamental values per share following a split announcement. We provide evidence that the incomplete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in traders' cognitive abilities.

Keywords: Stock splits, asset pricing, behavioral finance, 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

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Olga Rud (Contact Author)

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

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