Stock Splits And Market Reaction
Stock splits are like optical illusions but in reality they are only adjustments in the number of shares outstanding. The company’s equity and the value of shareholders’ holdings remain unchanged. The study conducted reveals that there exists a positive market reaction post-split announcements in case of the Indian stock market. The study done for a sample of 20 stock splits tracks the AR generated by BSE listed companies. Computation of AR associated with the stock split is done for trading days around the event date – split announcement date for the sample stocks, each making a stock split announcement during April 2006 to September 2008. The study reports empirical results conforming to the signaling hypothesis and are consistent with the results obtained by Asquith et al. (1989), Brennan and Copeland (1988), Grinblatt et al. (1984) and Lakonishok and Lev (1987). The study finds evidence of positive AR around the announcement date and confirms that the stock splits have a favourable impact on the stock price performance of the stocks as shown by positive market reaction post-split announcements, in the Indian context.
The findings of the study are consistent with the findings of the past research done which give evidence to support the semi-strong form of EMH in the context of Indian stock market. The study reveals that the information regarding the corporate announcements of stock splits is absorbed quickly into the share prices and has a measurable impact on the stock price performance of the stocks that announce and execute splits. However, the result holds true for the selected sample of BSE listed companies and during the period considered for the study. It cannot be generalized for other exchange traded stocks, nor for the BSE500 listed companies in other periods since even same companies making corporate announcements in the future do so in a different market environment.
Stock split should not be the only deciding factor that entices an investor into investing in a stock. There are some strong psychological reasons why companies split their stock; the investors should understand that split does not change any of the business fundamentals. An investor who can successfully predict which stocks are going to split by looking at their outstanding performance and soaring share prices can profit from investing in such stocks in the pre-announcement period because such stocks are likely to appreciate in share value. The key to making profits for an investor from this stage is being able to determine which stocks are the most likely to split during the next three to six months.
In conclusion, it can be stated that stock split announcements do attract investors, thus generating a positive market reaction.
