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The Differences Between Stock Splits and Stock Dividends

Author

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  • Bechmann, Ken L.

    (Department of Finance, Copenhagen Business School)

  • Raaballe, Johannes

    (Department of Management - University of Aarhus)

Abstract

It is often asserted that stock splits and stock dividends are purely cosmetic events. However, many studies have documented several stock market effects associated with stock splits and stock dividends. This paper examines the effects of these two types of events for the Danish stock market. Consistent with the existing literature, the two events are associated with a significantly positive announcement effect of ap-proximately 2.5%. However, when examining the two events more carefully, several important results are obtained. First, a firm's motivation for announcing the two events is completely different. Second, the positive stock market reaction is closely related to associated changes in a firm's payout policy, but the relationship varies for the two types of events. Finally, there is only very weak evidence for a change in the liquidity of the stock. On the whole, after controlling for the firm's payout policy, the results suggest that a stock split is a cosmetic event and that a stock dividend on its own is considered negative news.

Suggested Citation

  • Bechmann, Ken L. & Raaballe, Johannes, 2004. "The Differences Between Stock Splits and Stock Dividends," Working Papers 2004-1, Copenhagen Business School, Department of Finance.
    • Handle: RePEc:hhs:cbsfin:2004_001
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7181
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    References listed on IDEAS

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    11. Han, Ki C., 1995. "The Effects of Reverse Splits on the Liquidity of the Stock," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(1), pages 159-169, March.
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    Cited by:

    1. Karamjeet Kaur & Balwinder Singh, 2009. "Stock Price Reaction to Bonus Share Announcements in India," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 34(2), pages 202-226, May.
    2. Roger M. Kunz & Sandro Rosa‐Majhensek, 2008. "Stock Splits in Switzerland: To Signal or Not to Signal?," Financial Management, Financial Management Association International, vol. 37(2), pages 193-226, June.
    3. Md Saimum Hossain, 2017. "Market Reaction around the Event of a Stock Split: An Analysis on the Dhaka Stock Exchange," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(7), pages 212-212, June.

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    More about this item

    Keywords

    Stock splits; Stock dividends; Cash dividends; Signaling; Liquidity;
    All these keywords.

    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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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