Effect of Stock Split Announcement on Stock Performance of Neglected Firms from the Polish Capital Market
TL;DR: In this article, the authors examine the abnormal stock performance that accompanies stock split bills announced between 2000 and 2010 by neglected firms from the Polish capital market and find that market participants do not interpret pending stock split as a positive signal.
Abstract: The intriguing phenomenon, which is a stock split, has been remaining the subject of interest for academicians as well as for practitioners. Even though stock splits per se, at least theoretically, should not alter company’s profitability or ability to generate future cash flows they have continuously attracted the attention of inter alia stock market participants since the empirical evidence documented by a number of researchers contradicts the assumption of efficient market hypothesis and provides conspicuous input data for further analysis. In spite of the algebraic simplicity this firm-specific event has induced different reactions concerning various stock characteristics observed in a variety of capital markets all over the world what, in turn, perpetuates the state of an uncovered mystery. Splitting firms are likely to rarely opt out of splitting the stock once they have announced the stock split what may ensue from the fact that split is believed to be a costly signal. Although there exist different schools of thought trying to explain the motivations behind the phenomenon of split one might presume that at least some of them assume/underline the benefits that are expected to emerge following the event. In fact, literature abounds with evidence on enhanced liquidity, increased shareholders’ base, lower volatility of stock price, advanced shareholders’ wealth or greater percentage of individual shareholders in the ownership structure. In principle, companies that decide to announce the stock split are very likely to perform the split. Among miscellaneous explanations for stock splits the signaling hypothesis proclaims that managers split the shares with the purpose of disseminating private information, in particular their positive outlook for the nearest future or, equivalently, that the current situation is viewed to be preserved over the coming quarters. At the other extreme, neglected firm hypothesis tries to explain the motivation of a stock-split-announcing firm by the fact that managers strive to attract the attention of the stock market participants since such entities are often not actively followed by financial analysts and the market at large. Moreover, the scarce information set on neglected firms perpetuates this state of affairs. Therefore, management of neglected firms decide to split the shares in order to achieve the attention-getting effect due to the fact that as opposed to other corporate events like dividend announcement the stock split comprises no formal declaration of any change except for the increased number of shares outstanding and lower nominal value of shares.I examine the research sample composed of stock-splitting companies that are rarely followed by stock market participants, i.e. neglected firms. As a proxy to identify such entities I review the interest of financial analysts that cover the companies under consideration issuing the investment recommendations. Over 90% of the research sample were not actively followed by financial analysts in the period preceding the announcement of the split what underpins the neglected-firm hypothesis as the rationale behind splitting the stock. I perform the analysis of trading liquidity measured with trading volume for the companies at issue. I observe a diminution in liquidity following the announcement of the stock split bill what contradicts the assumptions of liquidity and/or trading range hypotheses and is likely to imply increased transaction cost for existing and prospective shareholders when trading in the splitting stock. Furthermore, I inspect the abnormal stock performance that accompanies stock split bills announced between 2000 and 2010 by neglected firms from the Polish capital market. I document stock price and abnormal returns upswing following the announcement that lasts for few trading sessions thereafter. I report that after a short-lived rebound in abnormal returns surrounding the announcement date stock-splitting companies experience deterioration in shareholders’ wealth over the two months following the announcement, therefore signaling hypothesis appears to explain the results obtained to small extent. The results indicate that market participants do not interpret pending stock split as a positive signal.
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TL;DR: In this paper, the authors present evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements.
Abstract: This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signaling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.
598 citations
"Effect of Stock Split Announcement ..." refers background in this paper
...The tax rate on capital gains is a flat rate and it amounts to 19% regardless of how long the stock is held before selling it.(6) Therefore, the tax–option hypothesis that attempts to explain the stock–split– announcement phenomenon is not applicable....
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...Grinblatt et al. (1984) contend that stock split announcements serve this goal in a better way because management attempt to provide vague information to competitors as well as to protect themselves from the liability for revealing profit forecasts that miss the projections announced....
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Posted Content•
TL;DR: In this paper, a catering theory of nominal stock prices is proposed and tested, which predicts that when investors place higher valuations on low-price firms, managers will maintain share prices at lower levels, and vice-versa.
Abstract: We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuations on low-price firms, managers will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.
167 citations
"Effect of Stock Split Announcement ..." refers background in this paper
...In fact, Baker et al. (2009) document a significant positive relation of post–split prices to the valuations of high–priced (or larger) stocks and significant negative relation of post–split prices to the valuations of low–priced (or smaller) stocks....
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...Baker et al. (2009) analyze the sample of 13,354 stock split announcements of the split factor at least 1.25–for–1 between 1963 through 2006 with the participation of companies listed on the New York Stock Exchange (NYSE)....
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...Baker et al. (2009) conclude that catering incentives do impact the post–split prices only in case of larger firms, i.e. larger companies attempt to be recognized as small ones in times when it is payable, in particular, in times of greater relative valuations assigned to low– priced stocks....
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TL;DR: The average nominal share prices of common stocks traded on the New York Stock Exchange have remained constant at approximately $35 per share since the Great Depression as a result of stock splits as mentioned in this paper.
Abstract: The average nominal share prices of common stocks traded on the New York Stock Exchange have remained constant at approximately $35 per share since the Great Depression as a result of stock splits. It is surprising that U.S. firms actively maintained constant nominal prices for their shares while general prices in the economy went up more than tenfold. This is especially puzzling given that commissions paid by investors on trading ten $35 shares are about ten times those paid on a single $350 share. We review potential explanations including signaling and optimal trading ranges and find that none of the existing theories are able to explain the observed constant nominal prices. We suggest that the evidence is consistent with the idea that customs and norms can explain the nominal price puzzle.
132 citations
"Effect of Stock Split Announcement ..." refers background in this paper
...Those who decide to act against this norm, e.g. the exceedingly high stock prices of Berkshire Heathaway Inc. ($128,880.00 apiece as of the 17th of Aug. 2012), „invite scrutiny” as Weld et al. (2009) claim....
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...On the other hand, Weld et al. (2009) argue that concrete norms for U.S. stock prices are dependent on such hallmarks as company’s size or the industrial sector it belongs to....
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...Weld et al. (2009) attempt to identify some customs and norms that operate with respect to stock prices....
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...Similarly to Weld et al. (2009), Dyl and Elliott (2006) observe almost constant stock prices over time along with strong run–up in market indices, e.g. between 1976 through 2001 the average annual price equals $27.31 whereas the S&P500 in the same time interval appreciate by an approximate 1,063%....
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...Interestingly, Weld et al. (2009) provide evidence that firms whose stock prices deviate from the price norm or alternatively that do not split the stock so as to shift the price to the price norm are not punished by the market, i.e. price–targeting companies („non–violators”) do not achieve…...
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TL;DR: In this article, the authors examined the market effect of stock splits on stock price, return, volatility, and trading volume around the split ex-dates for a sample of stock split undertaken in the Spanish stock market during 1998-1999.
Abstract: 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 Spanish stock market during 1998–1999. The empirical evidence confirms a negative effect on price and return of stock splits, and the presence of a positive effect on volatility and trading volume. These results suggest that stock splits have induced the market to revise its optimistic valuation about future firm performance, rejecting signalling hypothesis according to which splits convey positive information to markets. Therefore, stock splits have reduced the wealth of shareholders.
115 citations
"Effect of Stock Split Announcement ..." refers background in this paper
...In turn, the tax–option hypothesis disseminated inter alia by Lamoureux and Poon (1987) assumes that the stock is an epitome of a tax option....
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TL;DR: In this article, the authors investigated the effect of stock splits on the stock market in Germany and found that abnormal returns around the announcement day are much lower in Germany than in the U.S. This is in contrast to the results of Muscarella/Vetsuypens (1996) and Amihud/Mendelson/Lauterbach (1997).
Abstract: Although stock splits seem to be a purely cosmetic event, there exists ample empirical evidence from the United States that stock splits are associated with abnormal returns on both the announcement and the execution day, and additionally with an increase in variance following the ex-day. This paper investigates the market reaction to stock splits using a set of German firms. Consistent with the U.S. findings, similar effects are observed for the sample of German stock splits. Institutional differences between Germany and the U.S. allow to disentangle the three main hypotheses on the announcement effect - signalling, liquidity, and neglected firm hypothesis ? to gain further insights into their relative explanation power. This paper argues that legal restrictions strongly limit the ability of German companies to use a stock split for signaling. Consistently, abnormal returns around the announcement day are much lower in Germany than in the U.S. Although a significant increase in liquidity can be found after the split cross-sectional tests do not lend any support to the hypothesis that price changes are positively related to liquidity changes. This is in contrast to the results of Muscarella/Vetsuypens (1996) and Amihud/Mendelson/Lauterbach (1997). The paper shows that the announcement effect to German stock splits is best explained by a neglected firm effect. On the methodological side the effect of thin trading on event study results is examined. Using trade-to-trade returns increases the significance of abnormal returns but the difference between alternative return measurement methods is relatively small in short event periods. Thus, the observed market reaction cannot be attributed to measurement problems caused by thin trading.
59 citations