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Return predictability: The dual signaling hypothesis of stock splits

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  • Ahmed Elnahas
  • Lei Gao
  • Ghada Ismail

Abstract

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (overoptimistic/opportunistic) splits precede positive (negative) long‐term buy‐and‐hold abnormal returns. Using the calendar month portfolio approach, we show that the zero‐investment, ex ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre‐split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post‐split long‐term abnormal returns.

Suggested Citation

  • Ahmed Elnahas & Lei Gao & Ghada Ismail, 2019. "Return predictability: The dual signaling hypothesis of stock splits," The Financial Review, Eastern Finance Association, vol. 54(4), pages 801-831, November.
    • Handle: RePEc:bla:finrev:v:54:y:2019:i:4:p:801-831
    DOI: 10.1111/fire.12192
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    Cited by:

    1. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "Stock splits and retail trading," The Financial Review, Eastern Finance Association, vol. 57(4), pages 731-750, November.
    2. Ahmed M. Elnahas & Pankaj K. Jain & Thomas H. McInish, 2022. "Mixed‐signal stock splits," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 934-962, May.

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