Stock Splits: Real Effects or Just a Question of Maths? An Empirical Analysis of the Portuguese Case

Stock splits are conceptually a very simple corporate event that consists in the division of each share into a higher number of shares of smaller par value. These operations have long been a part of financial markets. Portugal witnessed 26 of these operations from 1999 (the year the euro was introduced) to June 2003 essentially due to a legislative change that took place when the corporate law was adapted for the introduction of the euro. In this paper stock splits are analyzed in terms of liquidity, risk, signaling and ideal price range explanations that could justify the sizeable cumulative abnormal returns (CAR) that we document around both announcement (5-day CAR of 3.8%) and ex-dates (5-day CAR of 7.5%). Our evidence shows no significant increase in trading volume (in EUR) although the number of trades does seem to increase, suggesting that trading by small investors is increased post-split. Our results also uncover an increase in the relative bid-ask spread but only for a sample subset of firms with the lowest pre- or post-split relative spreads. Our results also suggest, however, that liquidity reasons do not seem to be sufficient to explain the observed abnormal returns around the ex-date. A surprising feature is that the observed significant price increases were mainly concentrated around the ex-date, in contrast to most available evidence. The signaling hypotheses tested were not supported by the evidence presented in this study. These operations also cannot be explained by a placement of share prices levels closer to those of other Eurozone stock markets as Portuguese share prices levels are clearly much lower than the levels observable in those markets. We also conducted a survey directed at splitting firm. This confirmed that liquidity increases were indeed one of the main objectives pretended by the managers of these firms. Most companies, however, considered that this had not been accomplished. Another stated objective deemed important by managers was share capital simplification. This is puzzling since it is difficult to explain the sizeable wealth effects documented with simple changes in the par value itself. Our survey did not support signaling as a justification on the part of managers for the decision to split.