Market reactions to stock splits: Experimental evidence

John Duffy, Jean Paul Rabanal and Olga A. Rud

Journal of Economic Behavior & Organization, 2023, vol. 214, issue C, 325-345

Abstract: Stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of a firm's stock. In this paper we report an experiment designed to better understand market reactions to stock splits and reverse splits. In one treatment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other asset is not. In a second treatment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other asset is not. We find that in both cases, share prices do not fully adjust to changes in fundamental values per share following a split announcement. We provide evidence that the incomplete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in traders' cognitive abilities.

Keywords: Stock splits; Asset pricing; Behavioral finance; Cognitive reflection; Experimental finance (search for similar items in EconPapers)
JEL-codes: C92 G10 G40 G41 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Market Reactions to Stock Splits: Experimental Evidence (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:214:y:2023:i:c:p:325-345

DOI: 10.1016/j.jebo.2023.08.003

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