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Reverse stock splits and earnings performance

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  • Nikos Vafeas

Abstract

This paper presents evidence that reverse stock splits are preceded by significantly poorer earnings performance for splitting firms compared to a sample of matched control firms. Interestingly, the overall earnings-returns relationship becomes significantly stronger following the reverse stock split. I interpret this as evidence that reverse splits communicate to market participants that sub-par earnings performance before the split is not transitory and that it is expected to persist in the future. Together, the evidence in this paper provides an explanation as to why reverse splits, which are employed for reasons that are seemingly beneficial to shareholders, are assessed negatively, on balance, by market participants.

Suggested Citation

  • Nikos Vafeas, 2001. "Reverse stock splits and earnings performance," Accounting and Business Research, Taylor & Francis Journals, vol. 31(3), pages 191-202.
    • Handle: RePEc:taf:acctbr:v:31:y:2001:i:3:p:191-202
    DOI: 10.1080/00014788.2001.9729614
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    References listed on IDEAS

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    Cited by:

    1. Malcolm Anderson, 2002. "Accounting History publications 2001," Accounting History Review, Taylor & Francis Journals, vol. 12(3), pages 505-512.

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