Evading the Torpedo: Why Managers Avoid Stock Splits

51 Pages Posted: 26 May 2021 Last revised: 7 Sep 2021

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 (CityUHK)

Frank Zhang

Yale School of Management

Date Written: September 6, 2021

Abstract

In this paper, we document a previously unknown cost of stock splits: failure to sufficiently beat earnings targets and its associated capital markets punishment. We show that both firms’ earnings announcement returns and likelihood of beating analysts’ expectations by at least two cents decline post-stock split. This patterned decline in both split activity and post-split returns only occurs for publicly-listed firms, whereas abnormal returns for closed-end funds do not consistently vary over time. Overall, the results suggest that declining signaling benefits and increasing costs led to fewer stock splits in recent years.

Keywords: Stock Splits, Managerial Performance, Signaling, Capital Markets, Earnings

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 (September 6, 2021). 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 (CityUHK) ( 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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