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Do stock splits signal undervaluation?

Author

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  • Karim, Mohammad A.
  • Sarkar, Sayan

Abstract

Signaling theory of stock splits postulates that managers use stock splits to convey favorable private information to the market about the fair value of the firm and thus attempt to reduce or eliminate undervaluation. In this paper, we investigate this proposition using three different misvaluation estimates. Contrary to the undervaluation hypothesis, we find that split firms are overvalued, rather than undervalued for the seven years surrounding split announcements. Moreover, the overvaluation reaches its peak in the split announcement year and declines in the post-split period. Overall, our results suggest that firms do not use stock splits to signal undervaluation.

Suggested Citation

  • Karim, Mohammad A. & Sarkar, Sayan, 2016. "Do stock splits signal undervaluation?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 119-124.
    • Handle: RePEc:eee:beexfi:v:9:y:2016:i:c:p:119-124
    DOI: 10.1016/j.jbef.2016.01.004
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    Cited by:

    1. Jiaquan Chen & Marcel Ausloos, 2023. "A Study about Who Is Interested in Stock Splitting and Why: Considering Companies, Shareholders, or Managers," JRFM, MDPI, vol. 16(2), pages 1-25, January.

    More about this item

    Keywords

    Stock splits; Equity mispricing;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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