Do stock splits signal future profitability?

Do stock splits signal future profitability? This study examines whether stock split announcements contain information content about future profitability, measured in terms of future earnings change, future earnings, or future abnormal earnings. We find that the split announcement year has the highest earnings change and the earnings change declines substantially over the subsequent five years. Our empirical results show little evidence that stock splits are positively related to future profitability. In fact, stock splits are in general negatively related to future profitability in subsequent years after the announcement, except for dividend-paying firms with a split factor less than 0.5. This negative relation holds regardless of future profitability measure. Therefore, our empirical finding suggests that stock splits are not useful signals of a firm’s future earnings prospects. Review of Quantitative Finance and Accounting Springer Journals

Do stock splits signal future profitability?

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Kluwer Academic Publishers
Copyright © 2006 by Springer Science + Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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