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The Market Reaction To Stock Splits–Evidence From Germany

Author

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  • Carsten Hahn
  • Christian Wulff

Abstract

This paper investigates the market reaction to stock splits, using a set of German firms. Similar to the findings in the U.S., I find significant positive abnormal returns around both the announcement and the execution day of German stock splits. I also observe an increase in return variance and in liquidity after the ex-day. Apparently, legal restrictions strongly limit the ability of German companies to use a stock split for signaling. I find that abnormal returns around the announcement day are consistently much lower in Germany than in the U.S. Further, I find that abnormal returns around the announcement day are not related to changes in liquidity, but (negatively) to firm size, thus lending support to the neglected firm hypothesis. On the methodological side the effect of thin trading on event study results is examined. Using trade-to-trade returns increases the significance of abnormal returns, but the difference between alternative return measurement methods is relatively small in short event periods. Thus, the observed market reaction cannot be attributed to measurement problems caused by thin trading.

Suggested Citation

  • Carsten Hahn & Christian Wulff, 2002. "The Market Reaction To Stock Splits–Evidence From Germany," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 54(3), pages 270-297, July.
    • Handle: RePEc:sbr:abstra:v:54:y:2002:i:3:p:270-297
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    Citations

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    Cited by:

    1. Yagüe, José & Gómez-Sala, J. Carlos & Poveda-Fuentes, Francisco, 2009. "Stock split size, signaling and earnings management: Evidence from the Spanish market," Global Finance Journal, Elsevier, vol. 20(1), pages 31-47.
    2. Feito-Ruiz, Isabel & Renneboog, Luc & Vansteenkiste, Cara, 2020. "Elective stock and scrip dividends," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. Roger M. Kunz & Sandro Rosa‐Majhensek, 2008. "Stock Splits in Switzerland: To Signal or Not to Signal?," Financial Management, Financial Management Association International, vol. 37(2), pages 193-226, June.
    4. Md Saimum Hossain, 2017. "Market Reaction around the Event of a Stock Split: An Analysis on the Dhaka Stock Exchange," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(7), pages 212-212, June.
    5. Ken L. Bechmann & Johannes Raaballe, 2007. "The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 574-604, April.
    6. Cahit Adaoglu & Meziane Lasfer, 2011. "Why Do Companies Pay Stock Dividends? The Case of Bonus Distributions in an Inflationary Environment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(5-6), pages 601-627, June.
    7. Bechmann, Ken L. & Raaballe, Johannes, 2004. "The Differences Between Stock Splits and Stock Dividends," Working Papers 2004-1, Copenhagen Business School, Department of Finance.
    8. Al-Yahyaee, Khamis Hamed, 2014. "Shareholder wealth effects of stock dividends in a unique environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 66-81.
    9. Gorkittisunthorn, Maneeporn & Jumreornvong, Seksak & Limpaphayom, Piman, 2006. "Insider ownership, bid-ask spread, and stock splits: Evidence from the Stock Exchange of Thailand," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 450-461.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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