Return Predictability: The Dual Signaling Hypothesis of Stock Splits

Authors

• Ahmed Elnahas, The University of Texas Rio Grande Valley
• Lei Gao, Iowa State University
• Ghada Ismail, University of Memphis

Document Type

Article

Publication Date

5-1-2019

Abstract

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns.

Comments

Original published version available at https://doi.org/10.1111/fire.12192.

Recommended Citation

Elnahas, A., Gao, L. and Ismail, G., 2019. Return predictability: The dual signaling hypothesis of stock splits. Financial Review, 54(4), pp.801-831. https://doi.org/10.1111/fire.12192.

First Page

801

Last Page

831

Publication Title

The Financial Review

DOI

10.1111/fire.12192