Reverse stock splits and earnings performance

Nikos Vafeas

Accounting and Business Research, 2001, vol. 31, issue 3, 191-202

Abstract: This paper presents evidence that reverse stock splits are preceded by significantly poorer earnings performance for splitting firms compared to a sample of matched control firms. Interestingly, the overall earnings-returns relationship becomes significantly stronger following the reverse stock split. I interpret this as evidence that reverse splits communicate to market participants that sub-par earnings performance before the split is not transitory and that it is expected to persist in the future. Together, the evidence in this paper provides an explanation as to why reverse splits, which are employed for reasons that are seemingly beneficial to shareholders, are assessed negatively, on balance, by market participants.

Date: 2001
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DOI: 10.1080/00014788.2001.9729614

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