Market Reactions to Stock Splits: Experimental Evidence
34 Pages Posted: 25 Feb 2021
Date Written: February 22, 2021
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: Suggested Citation