Why Do Firms Split Their Stocks Before Acquisition Announcements?
46 Pages Posted: 1 Nov 2005
Date Written: February 2006
This paper documents that acquiring firms are more likely than non-acquiring firms to split their common stocks before making acquisition announcements, especially when the acquisition is financed by stock and when the deal is large. We investigate possible reasons for this pattern and find very little evidence supporting signaling theory and some evidence supporting the trading range hypothesis. Our results strongly support the hypothesis that some, though not all, acquiring firms use stock splits to inflate their equity value before acquisition announcements. Splitting acquirers experience more negative abnormal returns upon acquisition announcements and lower operating performance following the acquisitions compared with non-splitting acquirers. Furthermore, among splitting acquirers, the ones that are more likely to use stock splits to manipulate their stock values have lower operating performance and lower stock returns subsequent to the completion of acquisitions, especially when the deal is financed by equity.
Keywords: Stock Splits, Mergers and Acquisitions, Signaling, Optimal Trading Range, and Value Manipulation
JEL Classification: G34, G39
Suggested Citation: Suggested Citation