Evading the Torpedo: Why Managers Avoid Stock Splits

52 Pages Posted: 26 May 2021 Last revised: 1 Nov 2023

See all articles by John C. Heater

John C. Heater

Duke University - Fuqua School of Business

Ye Liu

Fudan University

Qin Tan

City University of Hong Kong (CityU)

Frank Zhang

Yale School of Management

Date Written: October 31, 2023

Abstract

In this paper, we document a previously unknown cost of stock splits. We find that stock splits decrease firms’ ability to meet the market’s expected performance, resulting in lower earnings announcement returns post-stock split. In exploring the channels that drive this phenomenon, we find evidence that investors do not fully adjust their EPS expectations for stock splits and that managers use accruals earnings management to fill the gap of expected earnings. We show that this cost of stock splits significantly increases over time, which partially explains the puzzling decrease in the frequency of stock splits.

Keywords: Stock Splits, Earnings, Managerial Incentives, Returns, Non-proportional Thinking

JEL Classification: G30, G32, M21, M4

Suggested Citation

Heater, John C. and Liu, Ye and Tan, Qin and Zhang, Frank, Evading the Torpedo: Why Managers Avoid Stock Splits (October 31, 2023). Available at SSRN: https://ssrn.com/abstract=3853047 or http://dx.doi.org/10.2139/ssrn.3853047

John C. Heater (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1085 (Phone)

HOME PAGE: http://www.johnheater.com

Ye Liu

Fudan University ( email )

670 Guoshun Rd
Shanghai, Shanghai 200433
China

Qin Tan

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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