Do stock splits signal future profitability?

  • Gow-Cheng Huang
  • Kartono Liano
  • Ming-Shiun Pan


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.


Stock splits Signaling Future profitability 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Admati AR, Pfleiderer P (1988) A Theory of Intraday Patterns: Volume and Price Variability. Review of Financial Studies 1:3–40CrossRefGoogle Scholar
  2. Angel JJ (1997) Tick Size, Share Prices and Stock Splits. Journal of Finance 52:655–681Google Scholar
  3. Asquith O, Healy P, Palepu K (1989) Earnings and Stock Splits. Accounting Review 64:387–403Google Scholar
  4. Baker HK, Gallagher PL (1980) Management’s View of Stock Splits. Financial Management 9:73–77Google Scholar
  5. Baker HK, Powell GE (1992) Why Companies Issue Stock Splits. Financial Management 21:11Google Scholar
  6. Boehme RD, Danielsen BR, Sorescu SM (2003) Stock split post-announcement returns: Underreaction or Market Friction? Working Paper, University of HoustonGoogle Scholar
  7. Brennan MJ, Copeland TE (1988) Stock Splits, Stock Prices, and Transaction Costs. Journal of Financial Economics 22:83–101CrossRefGoogle Scholar
  8. Brennan MJ, Hughes PJ (1991) Stock Prices and the Supply of Information. Journal of Finance 46:1665–1691Google Scholar
  9. Brooks L, Buckmaster D (1976) Further Evidence of the Time Series Properties of Accounting Income. Journal of Finance 31:1359–1373Google Scholar
  10. Byun J, Rozeff MS (2003) Long–run Performance after Stock Splits: 1927 to 1996. Journal of Finance 58:1063–1085CrossRefGoogle Scholar
  11. Chan LKC, Karceski J, Lakonishok J (2003) The Level and Persistence of Growth Rates. Journal of Finance 58:643–684Google Scholar
  12. Clayman M (1987) In Search of Excellence: The Investor’s Viewpoint. Financial Analysts Journal 43:54–63CrossRefGoogle Scholar
  13. Conroy JS, Harris R S, Benet BA (1990) The Effects of Stock Splits on Bid-ask Spreads. Journal of Finance 45:1285–1295Google Scholar
  14. Copeland TE (1979) Liquidity Changes Following Stock Split. Journal of Finance 34:115–141Google Scholar
  15. Desai H., Jain PC (1997) Long-run Common Stock Returns Following Stock Splits and Reverse Splits. Journal of Business 70:409–433CrossRefGoogle Scholar
  16. Dubofsky DA (1991) Volatility Increases Subsequent to NYSE and AMEX Stock Splits. Journal of Finance 46:421–431Google Scholar
  17. Easley D, O’Hara M, Saar G (2001) How Stock Splits Affect Trading: A Microstructure Approach. Journal of Financial and Quantitative Analysis 36:25–51Google Scholar
  18. Fama EF, Fisher L, Jensen M, Roll R (1969) The Adjustment of Stock Prices to New Information.International Economic Review 10:1–21Google Scholar
  19. Fama EF, French KR (2002) The Equity Premium. Journal of Finance 57:637–659CrossRefGoogle Scholar
  20. Freeman RN, Ohlson JA, Penman SH (1982) Book Rate-of-return and Prediction of Earnings Changes: An Empirical Investigation. Journal of Accounting Research 20:639–653Google Scholar
  21. Grinblatt MS, Masulis RW, Titman S (1984) The Valuation Effects of Stock Splits and Stock Dividends. Journal of Financial Economics 13:461–490CrossRefGoogle Scholar
  22. Grullon G, Michaely R (2004) The Information Content of Share Repurchase Programs. Journal of Finance 59:651–680CrossRefGoogle Scholar
  23. Ikenberry DL, Rankine G, Stice EK (1996) What Do Stock Splits Really Signal? Journal of Financial and Quantitative Analysis 31:357–375Google Scholar
  24. Ikenberry DL, Ramnath S (2002) Underreaction to Self-selected News Events: The Case of Stock Split. Review of Financial Studies 15:489–526CrossRefGoogle Scholar
  25. Lakonishok J, Lev B (1987) Stock Splits and Stock Dividends: Why, Who, and When. Journal of Finance 42:913–932Google Scholar
  26. Lamoureux CG, Poon P (1987) The Market Reaction to Stock Splits. Journal of Finance 42:1347–1370Google Scholar
  27. McNichols M, Dravid A (1990) Stock Dividends, Stock Splits, and Signaling. Journal of Finance 45:857–879Google Scholar
  28. Miller M, Rock K (1985) Dividend Policy under Asymmetric Information. Journal of Finance 60:1031– 1051Google Scholar
  29. Muscarella C, Vetsuypens M (1996) Stock splits: Signaling or liquidity? The case of ADR ‘solo splits’. Journal of Financial Economics 42:3–26CrossRefGoogle Scholar
  30. Nayak S, Prabhala NR (2001) Disentangling the Dividend Information in Splits: A Decomposition Using Conditional Event-study Methods. Review of Financial Studies 14:1083–1116CrossRefGoogle Scholar
  31. Nissim D, Ziv A (2001) Dividend Changes and Future Profitability. Journal of Finance 56:2111–2133CrossRefGoogle Scholar
  32. Powell GE, Baker HK (1993/1994) The Effects of Stock Splits on the Ownership Mix of A Firm. Review of Financial Economics 3:70–88Google Scholar
  33. Schultz P (2000) Stock Splits, Tick Size, and Sponsorship. Journal of Finance 55:429–450CrossRefGoogle Scholar
  34. White H (1980) A Heteroscedasticity-consistent Covariance Matrix and A Direct Test for Heteroscedasticity. Econometrica 48:817–838Google Scholar

Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  • Gow-Cheng Huang
    • 1
  • Kartono Liano
    • 2
  • Ming-Shiun Pan
    • 3
  1. 1.Department of Accounting and FinanceAlabama State UniversityMontgomeryUSA
  2. 2.Department of Finance and EconomicsMississippi State UniversityMississippi StateUSA
  3. 3.Department of Finance and Information Management & AnalysisShippensburg UniversityShippensburgUSA

Personalised recommendations