What Do Stock Splits Really Signal?

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1996

Posted: 25 Nov 1996

See all articles by David L. Ikenberry

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder

Graeme Rankine

Thunderbird, School of Global Management

Earl K. Stice

Hong Kong University of Science and Technology

Abstract

We observe significant post-split excess returns of 7.93% in the first year and 12.15% in the first three years for a sample of 1,275 two-for-one stock splits. These excess returns follow an announcement return of 3.38%, indicating that the market underreacts to split announcements. The evidence suggests that splits realign prices to a lower trading range, but managers self-select by conditioning the decision to split on expected future performance. Pre-split runup and post-split excess return are inversely related, indicating that our results are not caused by momentum.

JEL Classification: G39

Suggested Citation

Ikenberry, David L. and Rankine, Graeme and Stice, Earl K., What Do Stock Splits Really Signal?. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1996, Available at SSRN: https://ssrn.com/abstract=7929

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder ( email )

Boulder, CO 80309-0419
United States
303-492-1809 (Phone)

Graeme Rankine (Contact Author)

Thunderbird, School of Global Management ( email )

15249 N 59th Ave.
Glendale, AZ 85306
United States
602-978-7299 (Phone)
602-843-6143 (Fax)

Earl K. Stice

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
+852 2358-7583 (Phone)
+852 2358-1693 (Fax)

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