We observe a considerable increase of stock’s liquidity (turnover) after the split explained by reaching the optimal range of stock prices (long-term) and the price adjustment activity (short-term). However, the management choice of share price for an optimal trading range is ambiguous. In some cases, the split was designed to keep the share price close to the minimum level accepted by the market authorities, which causes the price adjustments more difficult (so-called penny stock problem). It shows, that different market regulations and corporate governance practices influence the financial effect of a stock split as well.
The increased activity after the split does not translate into investor’s abnormal return. However, investors’ returns become less volatile which changes stock’s risk profile in analyzed period. We find abnormal returns in the period prior to stock split and the day after it. This indicates that investors anticipate the possible change caused by the event and react to the signal of stock split announcement.
We use three methods to analyze the impact of stock splits on the rate of return (mean adjusted return, market model and market adjusted return). The analysis uses daily rates of return within time interval of [40;+40], i.e. from the 40th trading session preceding the split to the 40th session after the split as well as on the first session after the split. The results presented in this paper are calculated for entire population of split stocks and with omission of penny stocks.