Stock Splits and Market Anomalies

Abstract

Previous studies of market efficiency have reported conflicting results when examining stock splits. Recent studies reporting market inefficiencies have made several methodological improvements, but have failed to control for the possible confounding effects of “unexpected” changes in corporate earnings announced near the stock split event. Stock splits are often issued around the time that firms experience large increases in corporate earnings. Therefore, an explicit treatment of earnings announcements in an event study of stock splits may yield further insights. This study found no market inefficiencies associated with splitting securities that experienced moderate changes in corporate earnings. However, anomalies were associated with splitting securities that experienced large increases in corporate earnings. These results suggest that previous findings of market inefficiencies, attributable solely to the stock split event, may be due in part to unexpected changes in corporate earnings.

Stock splits and reverse splits in the Brazilian capital market

“…This anomaly contradicts the market efficiency hypothesis. Nichols and McDonald (1983) argue that stock splits often coincide with periods of large increases in corporate earnings. Recently, Shue and Townsend (2021) demonstrated that the total return volatility, idiosyncratic volatility and market beta immediately increased by approximately 30% following a 2-for-1 stock split.…”