Publication Type

Working Paper

Version

publishedVersion

Publication Date

3-2020

Abstract

We propose a behavioral signaling explanation for the positive announcement effects of stock splits. There are two key behavioral ingredients in our model. First, (retail) investors have misconceptions about stock splits that make them view stock splits as good news. Second, investors are loss-averse and will be particularly disappointed if a splitting firm’s ex-post performance falls short of expectation. In a separating equilibrium, only managers with favorable private information use stock splits to signal. Using a comprehensive sample of stock splits in China over the period of 1998 to 2017, we find supporting evidence: (1) stock splits elicit positive announcement returns and a higher split ratio is associated with a stronger market reaction; (2) splitting firms have better future operating performance and more favorable analyst forecasts; (3) when future performance is poor, splitting firms experience larger price declines than non-splitting firms; (4) the announcement returns of stock splits are smaller for firms with higher institutional ownership and firms with higher pre-split prices.

Keywords

Stock split, behavioral signaling, nominal price illusion, loss aversion

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

65

Publisher

SSRN

External URL

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3541201

Share

COinS