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 Journal of Financial and Quantitative Analysis
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 Volume 31
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 Issue 03
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 What Do Stock Splits Really Signal?

Journal of Financial and Quantitative Analysis

 Journal of Financial and Quantitative Analysis (1996), 31: 357-375
 Copyright © School of Business Administration, University of Washington 1996
 DOI: 10.2307/2331396 (About DOI) Published online: 06 Apr 2009

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Research Article

What Do Stock Splits Really Signal?

David L. Ikenberrya1, Graeme Rankinea2 and Earl K. Sticea3

a1
Jones Graduate School of Administration, Rice University, Houston, TX 77005
a2
American Graduate School of International Management, Glendale, AZ 85306
a3
Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Abstract
We observe significant post-split excess returns of 7.93 percent in the first year and 12.15

percent in the first three years for a sample of 1,275 two-for-one stock splits. These excess

returns follow an announcement return of 3.38 percent, indicating that the market underreacts to

split announcements. The evidence suggests that splits realign prices to a lower trading range,

but managers self-select by conditioning the decision to split on expected future performance.

Presplit runup and post-split excess returns are inversely related, indicating that our results are

not caused by momentum.