IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v51y2017icp574-598.html
   My bibliography  Save this article

Real determinants of stock split announcements

Author

Listed:
  • Hu, May
  • Chao, Chi-Chur
  • Malone, Chris
  • Young, Martin

Abstract

This paper examines the aggregate determinants of corporate events of stock splits. The evidence shows that good market conditions drive firms’ decisions to split shares and increase their associated returns, but the dominant effect of macroeconomic factors on stock split announcements is business cycle variations. Firms are most likely to split their shares when they have been experiencing enough excess earnings in economic upturns. This result is more consistent with the Neoclassical Efficiency Hypothesis. This research sheds light on the reasons why we observe corporate events happening in waves and enhance the understanding of why firms split shares at the aggregate level.

Suggested Citation

  • Hu, May & Chao, Chi-Chur & Malone, Chris & Young, Martin, 2017. "Real determinants of stock split announcements," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 574-598.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:574-598
    DOI: 10.1016/j.iref.2017.07.027
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S105905601730566X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2017.07.027?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    2. Harding, Don & Pagan, Adrian, 2011. "An Econometric Analysis of Some Models for Constructed Binary Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 86-95.
    3. Kristina Minnick & Kartik Raman, 2014. "Why are Stock Splits Declining?," Financial Management, Financial Management Association International, vol. 43(1), pages 29-60, March.
    4. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "Another January effect—Evidence from stock split announcements," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 123-138.
    5. Roger Huang & H. Weingartner, 2000. "Do Market Makers Suffer from Splitting Headaches?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 17(2), pages 105-126, August.
    6. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    7. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    8. repec:bla:jfinan:v:53:y:1998:i:1:p:335-349 is not listed on IDEAS
    9. Chan, Kalok & Wang, Junbo & Wei, K. C. John, 2004. "Underpricing and long-term performance of IPOs in China," Journal of Corporate Finance, Elsevier, vol. 10(3), pages 409-430, June.
    10. Lowry, Michelle, 2003. "Why does IPO volume fluctuate so much?," Journal of Financial Economics, Elsevier, vol. 67(1), pages 3-40, January.
    11. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    12. Stein, Jeremy C, 1996. "Rational Capital Budgeting in an Irrational World," The Journal of Business, University of Chicago Press, vol. 69(4), pages 429-455, October.
    13. Jinho Byun & Michael S. Rozeff, 2003. "Long‐run Performance after Stock Splits: 1927 to 1996," Journal of Finance, American Finance Association, vol. 58(3), pages 1063-1085, June.
    14. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    15. Angel, James J, 1997. "Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-681, June.
    16. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    17. Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, April.
    18. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    19. Ikenberry, David L. & Rankine, Graeme & Stice, Earl K., 1996. "What Do Stock Splits Really Signal?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 357-375, September.
    20. Chitru S. Fernando & Srinivasan Krishnamurthy & Paul A. Spindt, 1999. "Is Share Price Related to Marketability? Evidence from Mutual Fund Share Splits," Financial Management, Financial Management Association, vol. 28(3), Fall.
    21. DeAngelo, Harry & DeAngelo, Linda & Stulz, René M., 2010. "Seasoned equity offerings, market timing, and the corporate lifecycle," Journal of Financial Economics, Elsevier, vol. 95(3), pages 275-295, March.
    22. Massa, Massimo & Rehman, Zahid & Vermaelen, Theo, 2007. "Mimicking repurchases," Journal of Financial Economics, Elsevier, vol. 84(3), pages 624-666, June.
    23. Ranjan D'Mello & Oranee Tawatnuntachai & Devrim Yaman, 2003. "Why Do Firms Issue Equity after Splitting Stocks?," The Financial Review, Eastern Finance Association, vol. 38(3), pages 323-350, August.
    24. Anand S. Desai & M. Nimalendran & S. Venkataraman, 1998. "Changes In Trading Activity Following Stock Splits And Their Effect On Volatility And The Adverse-Information Component Of The Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 159-183, June.
    25. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    26. Michael Gort, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(4), pages 624-642.
    27. Chordia, Tarun & Shivakumar, Lakshmanan, 2006. "Earnings and price momentum," Journal of Financial Economics, Elsevier, vol. 80(3), pages 627-656, June.
    28. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "A macro-analysis of financial decisions: An examination of special dividend announcements," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 162-181.
    29. David L. Ikenberry & Sundaresh Ramnath, 2002. "Underreaction to Self-Selected News Events: The Case of Stock Splits," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 489-526, March.
    30. repec:bla:jfinan:v:58:y:2003:i:3:p:1063-1086 is not listed on IDEAS
    31. Paul Schultz, 2000. "Stock Splits, Tick Size, and Sponsorship," Journal of Finance, American Finance Association, vol. 55(1), pages 429-450, February.
    32. John M. Griffin & Xiuqing Ji & J. Spencer Martin, 2003. "Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole," Journal of Finance, American Finance Association, vol. 58(6), pages 2515-2547, December.
    33. Benninga, Simon & Helmantel, Mark & Sarig, Oded, 2005. "The timing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 75(1), pages 115-132, January.
    34. Paul Povel & Rajdeep Singh & Andrew Winton, 2007. "Booms, Busts, and Fraud," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1219-1254.
    35. Adrian R. Pagan & Kirill A. Sossounov, 2003. "A simple framework for analysing bull and bear markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 23-46.
    36. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time‐varying Expected Returns," Journal of Finance, American Finance Association, vol. 57(2), pages 985-1019, April.
    37. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
    38. James S. Ang & Yingmei Cheng, 2006. "Direct Evidence On The Market‐Driven Acquisition Theory," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(2), pages 199-216, June.
    39. Rau, P. Raghavendra & Stouraitis, Aris, 2011. "Patterns in the Timing of Corporate Event Waves," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 209-246, February.
    40. Robert M. Conroy & Robert S. Harris, 1999. "Stock Splits and Information: The Role of Share Price," Financial Management, Financial Management Association, vol. 28(3), Fall.
    41. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    42. Dittmar, Amy K. & Dittmar, Robert F., 2008. "The timing of financing decisions: An examination of the correlation in financing waves," Journal of Financial Economics, Elsevier, vol. 90(1), pages 59-83, October.
    43. Klein, Linda S & Peterson, David R, 1989. "Earnings Forecast Revisions Associated with Stock Split Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(4), pages 319-328, Winter.
    44. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    45. repec:bla:jfinan:v:58:y:2003:i:2:p:483-518 is not listed on IDEAS
    46. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    47. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    48. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    49. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "The Christmas effect—Special dividend announcements," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 15-30.
    50. Desai, Anand S & Nimalendran, M & Venkataraman, S, 1998. "Changes in Trading Activity Following Stock Splits and Their Effect on Volatility and the Adverse-Information Component of the Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 159-183, Summer.
    51. Dean Crawford & Diana R. Franz & Gerald J. Lobo, 2009. "The effect of the prolonged bull market on the market response to large and small stock distributions," American Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 1(3), pages 312-333.
    52. McNichols, Maureen & Dravid, Ajay, 1990. "Stock Dividends, Stock Splits, and Signaling," Journal of Finance, American Finance Association, vol. 45(3), pages 857-879, July.
    53. Linda S. Klein & David R. Peterson, 1989. "Earnings Forecast Revisions Associated With Stock Split Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(4), pages 319-328, December.
    54. repec:bla:jfinan:v:59:y:2004:i:6:p:2685-2718 is not listed on IDEAS
    55. Rodney D. Boehme & Sorin M. Sorescu, 2002. "The Long‐run Performance Following Dividend Initiations and Resumptions: Underreaction or Product of Chance?," Journal of Finance, American Finance Association, vol. 57(2), pages 871-900, April.
    56. Antoniou, Antonios & Lam, Herbert Y.T. & Paudyal, Krishna, 2007. "Profitability of momentum strategies in international markets: The role of business cycle variables and behavioural biases," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 955-972, March.
    57. Patrick Dennis & Deon Strickland, 2003. "The Effect Of Stock Splits On Liquidity And Excess Returns: Evidence From Shareholder Ownership Composition," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 355-370, September.
    58. Shourun Guo & Mark H. Liu & Weihong Song, 2008. "Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions," Financial Management, Financial Management Association International, vol. 37(4), pages 695-712, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. S. Amir Tabibian & Zhaoyong Zhang & Abdollah Ah Mand, 2021. "Stock Split Rule Changes and Stock Liquidity: Evidence from Bursa Malaysia," JRFM, MDPI, vol. 14(9), pages 1-15, August.
    2. Beladi, Hamid & Deng, Jie & Hu, May, 2021. "Cash flow uncertainty, financial constraints and R&D investment," International Review of Financial Analysis, Elsevier, vol. 76(C).
    3. Hu, May & Tuilautala, Mataiasi & Kang, Yuni, 2019. "Bandwagon effect: Special dividend payments," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 339-363.
    4. S. Amir Tabibian & Zhaoyong Zhang & Mohsen Jafarian, 2020. "How Does Split Announcement Affect Stock Liquidity? Evidence from Bursa Malaysia," Risks, MDPI, vol. 8(3), pages 1-14, August.
    5. Podgórski Błażej & Pasierbek Krzysztof, 2020. "The “Magic Action” of Stock Splits: Evidence from the Warsaw Stock Exchange 2003–2017," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 28(1), pages 66-80, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "A macro-analysis of financial decisions: An examination of special dividend announcements," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 162-181.
    2. Hu, May & Tuilautala, Mataiasi & Kang, Yuni, 2019. "Bandwagon effect: Special dividend payments," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 339-363.
    3. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "Another January effect—Evidence from stock split announcements," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 123-138.
    4. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    5. Chan, Konan & Li, Fengfei & Lin, Tse-Chun, 2019. "Earnings management and post-split drift," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 136-146.
    6. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    7. David Hirshleifer & Danling Jiang, 2010. "A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3401-3436.
    8. Li, Fengfei & Lin, Ji-Chai & Lin, Tse-Chun & Shang, Longfei, 2023. "Behavioral bias, distorted stock prices, and stock splits," Journal of Banking & Finance, Elsevier, vol. 154(C).
    9. Lin, Hsuan-Chu & Chou, Ting-Kai & Cheng, Jia-Chi, 2011. "Does market misvaluation drive post-acquisition underperformance in stock deals?," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 690-706, October.
    10. Chen, Honghui & Nguyen, Hoang Huy & Singal, Vijay, 2011. "The information content of stock splits," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2454-2467, September.
    11. Alimov, Azizjon & Mikkelson, Wayne, 2012. "Does favorable investor sentiment lead to costly decisions to go public?," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 519-540.
    12. Hirshleifer, David & Jiang, Danling, 2007. "Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns," MPRA Paper 16134, University Library of Munich, Germany, revised 08 Jul 2009.
    13. Al-Yahyaee, Khamis Hamed, 2014. "Shareholder wealth effects of stock dividends in a unique environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 66-81.
    14. Fu, Fangjian & Lin, Leming & Officer, Micah S., 2013. "Acquisitions driven by stock overvaluation: Are they good deals?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 24-39.
    15. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    16. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    17. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    18. Dittmar, Amy K. & Dittmar, Robert F., 2008. "The timing of financing decisions: An examination of the correlation in financing waves," Journal of Financial Economics, Elsevier, vol. 90(1), pages 59-83, October.
    19. Yagüe, José & Gómez-Sala, J. Carlos & Poveda-Fuentes, Francisco, 2009. "Stock split size, signaling and earnings management: Evidence from the Spanish market," Global Finance Journal, Elsevier, vol. 20(1), pages 31-47.
    20. Lin, Ji-Chai & Singh, Ajai K. & Yu, Wen, 2009. "Stock splits, trading continuity, and the cost of equity capital," Journal of Financial Economics, Elsevier, vol. 93(3), pages 474-489, September.

    More about this item

    Keywords

    Market driven; Business cycle; Stock splits;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:574-598. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.