Trade and Returns After Stock Splits
Abstract
A stock split is a company policy that does not have any economic value. For
an efficient market, investors should not react to stock split announcements. If the
market reacts to the stock split announcements that does not have an economic value,
it means that the market is still not efficient in semi strong form, because the market
still can not differentiate between the event which has and has no information
content. On the other hand, the market reactions to the stock split announcements can
also be inferred that the stock split do have information content.
Some theories in finance literature have emerged as the explanations of the
stock split. According to signaling hypothesis, managers declare the stock split to
convey favorable information about the value of the firm. According to trading range
theory hypothesis, the stock split is used to keep stock price within an optimal trading
range.
Some previous studies document that the stock split can cause abnormal
returns and convey the increase of earnings performance after the split. However,
some other previous studies do not document any abnormal returns because of the
stock split announcements.
Based on this controversy, this research is conducted to analyze whether the
abnormal return can be explained by signaling, liquidity, or volatility changes around
the stock split announcements. The objects of the research are corporations listed in
Jakarta Stock Exchange (JSX) that announce stock splits from 1999 until 2004, but
they do not have any other events following the stock split announcements, such as
issue, stock dividend, bonus stock, and financial report announcement date.
Based on the finding of the research, the stock split is merely an accounting
change with changes in the firm value. After the firms split their stock, there are
changes on the stock returnand returns volatility. This research also finds evidence to
support the signaling hypothesis and liquidity hypothesis as incentive for firms to
split their stock. As a result, this research concludes that stock split is a company
policy that has information content.
Because the stock split has information content, the market reacts to the stock
split announcements. It indicates that stock market in Jakarta Stock Exchange (JSX)
is not efficient in semi strong form, because the market can not differentiate between
the event which has and has no information content.
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