Stock Splits and Conditional Value Premium

We document a positive relation between average splitting stock announcement-day returns (SAR) and future value premium, and illustrate in three ways the intuition of this finding. First, SAR correlates negatively with future growth stock returns. Because most splits are for growth stocks, this result reflects the present-value relation that the positive SAR is partly due to a reduction in splitting stocks’ expected discount rates. The negative relation between CAPM-adjusted value and growth stock returns explains why SAR correlates positively with future value stock returns. Second, Google search volume of splitting stocks - a measure of investors’ attention - increases during the announcement week. SAR’s predictive power concentrates in stocks with low investor recognition, e.g., small stocks, and these stocks’ loadings on the value premium decrease after announcements. These results suggest that new investors attracted by split announcements re-evaluate splitting stocks using discount rates of their peers, i.e., growth stocks. Last, consistent with risk-based explanations, SAR correlates positively with future GDP growth and has significant explanatory power for the cross-section of stock returns.

This event is organised by Erasmus Finance Group.