Beyond Reverse Splits: How Do Fallen Angels Restructure?

Fisher College of Business Working Paper No. 2021-03-09

Charles A. Dice Center Working Paper No. 2021-09

56 Pages Posted: 14 Jun 2021 Last revised: 22 Dec 2023

See all articles by Abed El Karim Farroukh

Abed El Karim Farroukh

Indiana University - Kelley School of Business

Jennifer L. Koski

University of Washington - Michael G. Foster School of Business

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: June 11, 2021

Abstract

Firms with very low stock prices face a unique set of frictions that affect trading and liquidity. We study the restructuring actions of firms whose stock prices experience a sharp decline to a low-price level – fallen angels. We find that, relative to a matched sample, fallen angels implement more reverse stock splits. However, we find no significant relation between reverse splits and subsequent returns for our fallen angels, and reverse splits are associated with negative future returns for control stocks. Reverse splits are an ineffective way to avoid frictions associated with low stock prices. We therefore explore alternative restructuring actions and find that fallen angels cut investments in fixed assets and decrease operating expenses. Retrenching fallen angels experience higher subsequent returns but also increased delisting and financial distress risk, worse operating performance, lower growth opportunities, and higher asset volatility. Overall, our findings suggest that low-price firms must engage in actions beyond reverse splits to boost stock prices, and these actions are costly.

Keywords: Restructuring, retrenchment, low-price stocks, stock returns, operating performance

JEL Classification: G31, G32, G33

Suggested Citation

Farroukh, Abed El Karim and Koski, Jennifer Lynch and Werner, Ingrid M., Beyond Reverse Splits: How Do Fallen Angels Restructure? (June 11, 2021). Fisher College of Business Working Paper No. 2021-03-09, Charles A. Dice Center Working Paper No. 2021-09, Available at SSRN: https://ssrn.com/abstract=3866579 or http://dx.doi.org/10.2139/ssrn.3866579

Abed El Karim Farroukh

Indiana University - Kelley School of Business ( email )

United States

HOME PAGE: http://https://sites.google.com/view/farroukh

Jennifer Lynch Koski

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-7975 (Phone)
206-685-9392 (Fax)

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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