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Why Do Firms Issue Equity after Splitting Stocks?

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  • Ranjan D'Mello
  • Oranee Tawatnuntachai
  • Devrim Yaman
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    Abstract

    This paper examines the motivations of firms that conduct seasoned equity offerings (SEOs) after splitting stocks. We find no difference in equity announcement and issue period returns between these firms and other equity-issuing firms, suggesting that firms do not split stocks to reveal information and reduce adverse selection costs at the subsequent SEO. However, because investors react positively to split announcements, firms that issue equity after splitting stocks sell new shares at a higher price and raise more funds. We also find that firms split stocks to make the subsequent SEO more marketable to individual investors who are attracted to low-priced shares. Copyright 2003 by the Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal The Financial Review.

    Volume (Year): 38 (2003)
    Issue (Month): 3 (08)
    Pages: 323-350

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    Handle: RePEc:bla:finrev:v:38:y:2003:i:3:p:323-350

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Kuo, Nan-Ting & Lee, Cheng-Few, 2013. "Effects of dividend tax and signaling on firm valuation: Evidence from taxable stock dividend announcements," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 157-180.

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