Alon Kalay

The Market Reaction to Stock Split Announcements: Earnings Information After All

Coauthor(s): Mathias Kronlund.


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While recent research focuses on liquidity and catering theories to explain the abnormal returns around stock split announcements, we revisit the information-based explanation. We examine analyst forecasts revisions around stock split announcements, controlling for potentially confounding news, and find that analysts revise earnings forecasts upwards by 2–3% around split announcements. Matched firms with similar past performance experience no revision. We further show that splitting firms experience less mean reversion in earnings growth than matched firms; this earnings growth process is consistent with the hypothesis that analysts update their beliefs about the persistence of splitting firms' past earnings growth following the announcement. The analyst revision and abnormal returns are larger for firms for which there is otherwise less information, as measured by fewer analysts. Finally, we find evidence on splitting activity and the market reaction to split announcements that is inconsistent with liquidity-based theories and mixed with respect to catering.

Source: Working paper
Exact Citation:
Kalay, Alon, and Mathias Kronlund. "The Market Reaction to Stock Split Announcements: Earnings Information After All." Working paper, Columbia Business School, 2014.
Date: 2014