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Stock Dividends, Stock Splits, and Signaling

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Author Info
 McNichols, Maureen
Dravid, Ajay
Abstract

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Further more, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete. Copyright 1990 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 45 (1990)
Issue (Month): 3 (July)
Pages: 857-79
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Handle: RePEc:bla:jfinan:v:45:y:1990:i:3:p:857-79

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  1. Juan Carlos Gómez-Sala, 2001. "Rentabilidad y liquidez alrededor de la fecha de desdoblamiento de las acciones," Investigaciones Economicas, Fundación SEPI, vol. 25(1), pages 171-202, January. [Downloadable!]
  2. Edward J. Kane & Berry K. Wilson, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," NBER Working Papers 6451, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Bechmann, Ken L. & Raaballe, Johannes, 2004. "The Differences Between Stock Splits and Stock Dividends," Working Papers 2004-1, Copenhagen Business School, Department of Finance. [Downloadable!]
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