Why Do Firms Split Their Stocks Before Acquisition Announcements?

46 Pages Posted: 1 Nov 2005

See all articles by Shourun Guo

Shourun Guo

Duke Energy Corp.

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Weihong Song

Independent

Date Written: February 2006

Abstract

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

Guo, Shourun and Liu, Mark H. and Song, Weihong, Why Do Firms Split Their Stocks Before Acquisition Announcements? (February 2006). Available at SSRN: https://ssrn.com/abstract=828704 or http://dx.doi.org/10.2139/ssrn.828704

Shourun Guo

Duke Energy Corp. ( email )

139 East Fourth Street
EA600
Cincinnati, OH 45202
United States

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

Weihong Song

Independent

No Address Available

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