Evading the Torpedo: Why Managers Avoid Stock Splits

57 Pages Posted: 26 May 2021 Last revised: 14 Jun 2022

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: June 13, 2022

Abstract

In this paper, we document a previously unknown cost of stock splits: an increased likelihood of missing earnings targets and the associated capital market punishment. We show that both the likelihood of beating the market’s earnings expectations and earnings announcement returns decline post stock split, a result consistent with investors exhibiting non-proportional thinking (Shue and Townsend, 2021) around earnings expectations and firms having increasing difficulty of managing earnings to achieve the same EPS beat. This cost of stock splits is increasing significantly over time, as the market assigns a larger penalty on earnings underperformance. The increasing cost of stock splits, coupled with a modest decline in the benefits of stock splits, explains the decrease in the frequency of stock splits. Overall, our findings suggest that firms are concerned about the costs of splitting stocks and these increasing costs led to managers avoiding stock splits in recent years.

Keywords: Stock Splits, Earnings, 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 (June 13, 2022). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
152
Abstract Views
615
rank
270,960
PlumX Metrics