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, Ahmed, Lei Gao, and Ghada Ismail. “Return Predictability: The Dual Signaling Hypothesis of Stock Splits.” The Financial Review 54, no. 4 (May 2019): 801–31. https://doi.org/10.1111/fire.12192.

First Page

801

Last Page

831

Publication Title

The Financial Review

DOI

10.1111/fire.12192