Effect of stock split announcement on stock performance of companies from Polish market

„Effect of Stock Split Announcement on Stock Performance–Case of the Warsaw Stock Exchange”

The intriguing phenomenon, which is a stock split, has been remaining the subject of interest for academicians as well as for practitioners. Even though stock splits per se, at least theoretically, should not alter company’s profitability or ability to generate future cash flows they have continuously attracted the attention of inter alia stock market participants since the empirical evidence documented by a number of researchers contradicts the assumption of efficient market hypothesis and provides conspicuous input data for further analysis. In spite of the algebraic simplicity this firm–specific event has induced different reactions concerning various stock characteristics observed in a variety of capital markets all over the world what, in turn, perpetuates the state of an uncovered mystery.
Splitting firms are likely to rarely opt out of splitting the stock once they have announced the stock–split event what may ensue from the fact that split is believed to be
a costly signal . Although there exist different schools of thought trying to explain the motivations behind the splits one might presume that at least some of them assume/underline the benefits that are expected to emerge following the event. In fact, literature abounds with evidence on enhanced liquidity, increased shareholders’ base, lower volatility of stock price, advanced shareholders’ wealth or greater percentage of individual shareholders in the ownership structure. In brief, companies that decide to announce the stock split are very likely to perform the split. Among miscellaneous explanations of stock splits the signaling hypothesis proclaims that managers split the stock in order to disseminate private information, in particular their positive outlook for the nearest future or, equivalently, that the current situation is viewed to be preserved over the coming quarters.
I inspect the abnormal stock performance in the event window [–40;+40] that accompanies stock split bills announced between 2000 and 2010 by companies listed on Warsaw Stock Exchange. I document a stock price upswing following the announcement that lasts for five trading sessions. Contrary to the signaling explanation of stock splits, I report that after a short–lived rebound in abnormal returns surrounding the announcement date stock splitting companies experience deterioration in the shareholders’ wealth over the two months following the announcement. The results, 1–percent significant, indicate that market participants interpret pending stock split as a negative signal. Moreover, I examine the behavior of abnormal stock performance of companies that announce the passage of the stock split bill and, in principal, I find similar relationship, i.e. slumping abnormal returns. In summary, stock splits are not a [positive] signal from the perspective of shareholders’ wealth or, equivalently, stock splits signal slippage of shareholders’ wealth.