THE MARKET REACTION TO STOCK SPLITS — EVIDENCE FROM INDIA

Alok Mishra ()

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 02, 251-271

Abstract: Stock splits are a relatively new phenomenon in the Indian context. This paper examines the market effect of stock splits on stock price, return, volatility, and trading volume around the split ex-dates for a sample of stock splits undertaken in the Indian stock market over the period 1999–2005.The traditional view of stock splits as cosmetic transactions that simply divide the same pie into more slices is inconsistent with the significant wealth effect associated with the announcement of a stock split. However, the empirical evidence confirms a negative effect on price and return of stock splits. The overall cumulative abnormal returns after the split are negative. These results suggest that stock splits have induced the market to revise its optimistic valuation about future firm performance, rejecting signaling hypothesis to which splits convey positive information to markets. Hence, stock splits have reduced the wealth of the shareholders. The results also show that presence of a positive effect on volatility and trading volume following the split events, thus suggesting that split events enhance liquidity.

Keywords: Stock splits; India; split announcements; signaling hypothesis; liquidity hypothesis; trading volume (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219024907004226

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