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.
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.
The Financial Review