Evading the Torpedo: Why Managers Avoid Stock Splits
51 Pages Posted: 26 May 2021 Last revised: 7 Sep 2021
Date Written: September 6, 2021
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: Suggested Citation