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Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?

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  • Seoyoung Kim
  • April Klein
  • James Rosenfeld

Abstract

We examine the long‐run return performance of over 1,600 firms with reverse stock splits. These stocks record statistically significant negative abnormal returns over the three‐year period following the month of the reverse split. The sample firms experience poor operating performances over the four years that include and follow the year of the reverse split, which suggests informational inefficiencies. Because these stocks have unique financial characteristics, we also show that they would be very difficult to sell short. Thus, arbitrageurs would be restricted in their ability to earn abnormal profits, even if they correctly anticipated a price decline.

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  • Seoyoung Kim & April Klein & James Rosenfeld, 2008. "Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?," Financial Management, Financial Management Association International, vol. 37(2), pages 173-192, June.
    • Handle: RePEc:bla:finmgt:v:37:y:2008:i:2:p:173-192
    DOI: 10.1111/j.1755-053X.2008.00009.x
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    References listed on IDEAS

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    Cited by:

    1. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic: A Unified Explanation for Equity Puzzles," MPRA Paper 68729, University Library of Munich, Germany.
    2. Jae-Kwang Hwang & Young Dimkpah & Alex Ogwu, 2012. "Do Reverse Stock Splits Benefit Long-term Shareholders?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(4), pages 439-449, November.
    3. Siddiqi, Hammad, 2015. "Anchoring Adjusted Capital Asset Pricing Model," Risk and Sustainable Management Group Working Papers 211224, University of Queensland, School of Economics.
    4. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    5. Siddiqi, Hammad, 2015. "Anchoring Heuristic and the Equity Premium Puzzle," MPRA Paper 68537, University Library of Munich, Germany.
    6. Blau, Benjamin M. & Cox, Justin S. & Griffith, Todd G. & Voges, Ryan, 2023. "Daily short selling around reverse stock splits," Journal of Financial Markets, Elsevier, vol. 65(C).
    7. Han-Ching Huang & Yong-Chern Su & Chun-E Shih, 2015. "Evidence On The Speed Of Convergence To Market Efficiency: Evidence From Stock Spin-Offs," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 9(2), pages 1-8.
    8. Kolari, James W. & Pynnonen, Seppo & Tuncez, Ahmet M., 2021. "Further evidence on long-run abnormal returns after corporate events," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 421-439.
    9. Hammad, Siddiqi, 2015. "Anchoring Adjusted Capital Asset Pricing Model," MPRA Paper 67403, University Library of Munich, Germany.
    10. Kee H. Chung & Sean Yang, 2015. "Reverse Stock Splits, Institutional Holdings, and Share Value," Financial Management, Financial Management Association International, vol. 44(1), pages 177-216, March.
    11. Claire Crutchley & Steven Swidler, 2015. "Multiple reverse stock splits (investors beware!)," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 357-369, April.
    12. Ma-Ju Wang, 2014. "A Study on the Differences in Adopting Cash Refund Capital Reduction and Stock Repurchase By Companies in Bull and Bear Stock Markets," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(9), pages 1237-1253, September.
    13. Keith Jakob & Ryan Whitby, 2017. "The impact of nominal stock price on ex-dividend price responses," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 939-953, May.
    14. Hammad, Siddiqi, 2015. "Capital Asset Pricing Model Adjusted for Anchoring," MPRA Paper 67668, University Library of Munich, Germany.
    15. Neuhauser, Karyn L. & Thompson, Thomas H., 2016. "Survivability following reverse stock splits: What determines the fate of non-surviving firms?," Journal of Economics and Business, Elsevier, vol. 83(C), pages 1-22.
    16. Zaremba, Adam & Okoń, Szymon & Asyngier, Roman & Schroeter, Lucia, 2019. "Reverse splits in international stock markets: Reconciling the evidence on long-term returns," Research in International Business and Finance, Elsevier, vol. 47(C), pages 552-562.
    17. Siddiqi, Hammad, 2016. "Anchoring and Adjustment Heuristic: A Unified Explanation for Asset-Return Puzzles," Risk and Sustainable Management Group Working Papers 229607, University of Queensland, School of Economics.
    18. Bostan, Ibrahim & Lin, Ji-Chai & Mian, G. Mujtaba, 2024. "Do firms manage their share prices to mitigate investor short-termism?," Journal of Corporate Finance, Elsevier, vol. 84(C).
    19. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "Stock splits and retail trading," The Financial Review, Eastern Finance Association, vol. 57(4), pages 731-750, November.
    20. Choi, Seungmook & Jameson, Mel & Jung, Mookwon, 2013. "The issuance of callable bonds under information asymmetry," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 1-14.

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