The Differences Between Stock Splits and Stock Dividends

Ken L. Bechmann and Johannes Raaballe
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Ken L. Bechmann: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Johannes Raaballe: Department of Management - University of Aarhus

No 2004-1, Working Papers from Copenhagen Business School, Department of Finance

Abstract: It is often asserted that stock splits and stock dividends are purely cosmetic events. However, many studies have documented several stock market effects associated with stock splits and stock dividends. This paper examines the effects of these two types of events for the Danish stock market. Consistent with the existing literature, the two events are associated with a significantly positive announcement effect of ap-proximately 2.5%. However, when examining the two events more carefully, several important results are obtained. First, a firm's motivation for announcing the two events is completely different. Second, the positive stock market reaction is closely related to associated changes in a firm's payout policy, but the relationship varies for the two types of events. Finally, there is only very weak evidence for a change in the liquidity of the stock. On the whole, after controlling for the firm's payout policy, the results suggest that a stock split is a cosmetic event and that a stock dividend on its own is considered negative news.

Keywords: Stock splits; Stock dividends; Cash dividends; Signaling; Liquidity (search for similar items in EconPapers)
JEL-codes: G14 G32 G35 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-03-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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