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Market Reactions to Stock Splits: Experimental Evidence

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  • Duffy, John

    (University of California)

  • Rabanal, Jean Paul

    (University of Stavanger)

  • Rud, Olga

    (University of Stavanger)

Abstract

We report on an experiment studying market reactions to stock splits and reverse splits. In the first environment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other is not. In the second environment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other is not. We find that share prices do not fully adjust to changes in fundamental values per share following both types of splits and we relate this phenomenon to difficulties that traders have with proportional thinking.

Suggested Citation

  • Duffy, John & Rabanal, Jean Paul & Rud, Olga, 2021. "Market Reactions to Stock Splits: Experimental Evidence," UiS Working Papers in Economics and Finance 2021/1, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2021_001
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    More about this item

    Keywords

    Stock splits; behavioral finance;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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