Trade and Returns After Stock Splits

Abstract

A stock split is a company policy that does not have any economic value. For an efficient market, investors should not react to stock split announcements. If the market reacts to the stock split announcements that does not have an economic value, it means that the market is still not efficient in semi strong form, because the market still can not differentiate between the event which has and has no information content. On the other hand, the market reactions to the stock split announcements can also be inferred that the stock split do have information content. Some theories in finance literature have emerged as the explanations of the stock split. According to signaling hypothesis, managers declare the stock split to convey favorable information about the value of the firm. According to trading range theory hypothesis, the stock split is used to keep stock price within an optimal trading range. Some previous studies document that the stock split can cause abnormal returns and convey the increase of earnings performance after the split. However, some other previous studies do not document any abnormal returns because of the stock split announcements. Based on this controversy, this research is conducted to analyze whether the abnormal return can be explained by signaling, liquidity, or volatility changes around the stock split announcements. The objects of the research are corporations listed in Jakarta Stock Exchange (JSX) that announce stock splits from 1999 until 2004, but they do not have any other events following the stock split announcements, such as issue, stock dividend, bonus stock, and financial report announcement date. Based on the finding of the research, the stock split is merely an accounting change with changes in the firm value. After the firms split their stock, there are changes on the stock returnand returns volatility. This research also finds evidence to support the signaling hypothesis and liquidity hypothesis as incentive for firms to split their stock. As a result, this research concludes that stock split is a company policy that has information content. Because the stock split has information content, the market reacts to the stock split announcements. It indicates that stock market in Jakarta Stock Exchange (JSX) is not efficient in semi strong form, because the market can not differentiate between the event which has and has no information content.