Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?

Abstract

This paper examines the long-run return performance of over 1,600 firms with reverse stock splits over a 40-year period. These stocks record statistically significant negative abnormal returns over the three-year period following the month of the reverse split. The fact that the sample firms experience a poor operating performance over the four years including and following the year of the reverse split is consistent with these results and suggests market informational inefficiencies. However, due to their unique financial characteristics, we provide evidence that the sample stocks would be very difficult to sell short. Thus, arbitrageurs would be restricted in their ability to earn abnormal profits, even if they correctly anticipated a price decline.

Keywords: Stock, performance, investors, splits, profit

JEL Classification: G14