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The Market Reaction To Stock Splits — Evidence From India

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  • A. K. MISHRA

    (Indian Institute of Management, Prabandh Nagar, Off. Sitapur Road, Lucknow–226013, India)

Abstract

Stock splits are a relatively new phenomenon in the Indian context. This paper examines the market effect of stock splits on stock price, return, volatility, and trading volume around the split ex-dates for a sample of stock splits undertaken in the Indian stock market over the period 1999–2005.The traditional view of stock splits as cosmetic transactions that simply divide the same pie into more slices is inconsistent with the significant wealth effect associated with the announcement of a stock split. However, the empirical evidence confirms a negative effect on price and return of stock splits. The overall cumulative abnormal returns after the split are negative. These results suggest that stock splits have induced the market to revise its optimistic valuation about future firm performance, rejecting signaling hypothesis to which splits convey positive information to markets. Hence, stock splits have reduced the wealth of the shareholders. The results also show that presence of a positive effect on volatility and trading volume following the split events, thus suggesting that split events enhance liquidity.

Suggested Citation

  • A. K. Mishra, 2007. "The Market Reaction To Stock Splits — Evidence From India," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 251-271.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:02:n:s0219024907004226
    DOI: 10.1142/S0219024907004226
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    References listed on IDEAS

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    1. James J. Angel & Raymond M. Brooks & Prem G. Mathew, 2004. "When‐Issued Shares, Small Trades, And The Variance Of Returns Around Stock Splits," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 415-433, September.
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    Cited by:

    1. Polwat Lerskullawat, 2013. "Warrant Seos in an Emerging Market: Evidence from Thailand," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management,, ToKnowPress.
    2. Bilal Ahmad Pandow & Khurshid Ahmad Butt, 2019. "Impact of Share Splits on Stock Returns: Evidences from India," Vision, , vol. 23(4), pages 432-441, December.
    3. Pradip Banerjee & Prithviraj S. Banerjee, 2012. "Signalling Hypothesis and Clientele Shifts: Evidence from Indian Stock Splits," Global Business Review, International Management Institute, vol. 13(2), pages 297-309, June.
    4. Amro Saleem Alamaren & Adeel Khaliq, 2021. "An Empirical Study of COVID-19 Vaccine Announcement of Selected Companies by Using Event Study Methodology," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(3), pages 86-97.
    5. Ruzbeh J. Bodhanwala, 2015. "Stock Split: A Test of Market Efficiency on Indian Stocks (2001–2013)," Global Business Review, International Management Institute, vol. 16(5_suppl), pages 112-124, October.

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