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The Differences Between Stock Splits and Stock Dividends

Author

Listed:
  • Bechmann, Ken L.

    (Department of Finance, Copenhagen Business School)

  • Raaballe, Johannes

    (Department of Management - University of Aarhus)

Abstract

It is often asserted that stock splits and stock dividends are purely cosmetic events. However, many studies have documented several stock market effects associated with stock splits and stock dividends. This paper examines the effects of these two types of events for the Danish stock market. Consistent with the existing literature, the two events are associated with a significantly positive announcement effect of ap-proximately 2.5%. However, when examining the two events more carefully, several important results are obtained. First, a firm's motivation for announcing the two events is completely different. Second, the positive stock market reaction is closely related to associated changes in a firm's payout policy, but the relationship varies for the two types of events. Finally, there is only very weak evidence for a change in the liquidity of the stock. On the whole, after controlling for the firm's payout policy, the results suggest that a stock split is a cosmetic event and that a stock dividend on its own is considered negative news.

Suggested Citation

  • Bechmann, Ken L. & Raaballe, Johannes, 2004. "The Differences Between Stock Splits and Stock Dividends," Working Papers 2004-1, Copenhagen Business School, Department of Finance.
  • Handle: RePEc:hhs:cbsfin:2004_001
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7181
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    References listed on IDEAS

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    1. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
    2. Lakonishok, Josef & Lev, Baruch, 1987. " Stock Splits and Stock Dividends: Why, Who, and When," Journal of Finance, American Finance Association, vol. 42(4), pages 913-932, September.
    3. Han, Ki C., 1995. "The Effects of Reverse Splits on the Liquidity of the Stock," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 159-169, March.
    4. Hamish Anderson & Steven Cahan & Lawrence C. Rose, 2001. "Stock Dividend Announcement Effects in an Imputation Tax Environment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5-6), pages 653-669.
    5. Angel, James J, 1997. " Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-681, June.
    6. McNichols, Maureen & Dravid, Ajay, 1990. " Stock Dividends, Stock Splits, and Signaling," Journal of Finance, American Finance Association, vol. 45(3), pages 857-879, July.
    7. Anand S. Desai & M. Nimalendran & S. Venkataraman, 1998. "Changes In Trading Activity Following Stock Splits And Their Effect On Volatility And The Adverse-Information Component Of The Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 159-183, June.
    8. Nayak, Subhankar & Prabhala, Nagpurnanand R, 2001. "Disentangling the Dividend Information in Splits: A Decomposition Using Conditional Event-Study Methods," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1083-1116.
    9. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    10. Rankine, Graeme & Stice, Earl K., 1997. "The Market Reaction to the Choice of Accounting Method for Stock Splits and Large Stock Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 161-182, June.
    11. Paul Schultz, 2000. "Stock Splits, Tick Size, and Sponsorship," Journal of Finance, American Finance Association, vol. 55(1), pages 429-450, February.
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    More about this item

    Keywords

    Stock splits; Stock dividends; Cash dividends; Signaling; Liquidity;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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