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; University of Illinois at Urbana-Champaign - Department of Finance

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)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
340 Wohlers Hall
Champaign, IL 61820
United States
217-333-6396 (Phone)
217-333-4101 (Fax)

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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