The Market Reaction To Stock Splits Used as Dividends

Yang Xiao-Xuan

Guanghua School of Management, Peking University, Beijing 100871, China.

DOI: 10.4236/ti.2013.41B009                

Abstract

This paper investigates the market reaction to stock splits based on China’s A share companies between 2007 to 2010. I find significant positive abnormal returns around the announcement date (especially before the announcement date) as well as four to six days before the execution date of China stock splits. I also observe significant negative abnormal returns just around the execution date. The above phenomenon is relatively stable even if the selection of samples and empirical models may vary, but the degree of this phenomenon might change overtime. The cross sectional regression of the abnormal returns for the announcement date shows that the phenomenon is sensitive to the split ratio and the market, and it is not sensitive to industry, company size and cash dividends. Therefore, combining with the empirical data i have constructed a high Sharpe ratio short selling investment strategy around the execution date. Then, the article further discusses the operability of the investment strategy and its stability over time.

Keywords

China’s A share companies, Stock splits, Stock dividends, Announcement date, Execution date

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	.Paul Asquith, Paul Healy, Krishna Palepu. (1989). Earnings and Stock Splits[J]. The Accounting Review, Vol.64, No. 3, 387‐403.
[2]	BakerH.Kent, Po-wellE.Gary. (1993). Further evidence on managerial mo-tives for stock splits[J]. Quaterly Journal of Business and Economics, Vol. 32, No. 3, 20‐31.
[3]	Chris J. Mus-carella, Michael R. Vetsuypens. (1996). Stock splits: Signaling or liquidity? The case of ADR`solo‐splits'[J]. Journal of Financial Economics, Volume 42, Issue 1, 3‐26.
[4]	Christian Wulff.(2002).The Market Reaction To Stock Splits- Evidence From Germany[J]. Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 54(3), 270‐297.
[5]	Eisemann P,M.Moses. Stock Divi-dends:Management’s View[J]. Financial Analysis Jour-nal,1978.
[6]	Eades D ,P.Hess, and H. Kim. On Interpreting Security Returns during the Ex- dividend period[J]. Journal of Financial Econom-ics,1984.
[7]	Woolridge R. Ex- date Stock Price Ad-justment to Stock Dividends[J]. A Note. Journal of Finance,1983.
[8]	Eades D,P. Hess, and H. Kim .On Interpreting Security Returns during the Ex- dividend period[J].Journal of Financial Econom-ics,1984.
[9]	XUE Zu-yun, LIU Wan-li. 2009. An em-pirical study of motivations behind stock dividends in China’s listed companies[J]. Journal of Xiamen Univer-sity(Arts & Social Sciences), Vol. 5, pp. 114-121.
[10]	ZHANG Shui-quan, HAN Zong-de.1997. An empirical study on the effect of dividend and bonus in Shanghai stock market. Forecasting. Vol. 2, pp. 28-33.
[11]	LIU Wan-li, XUE Zu-yun. 2010. The effect of stock dividend on shareholders’ value: evidences from Chinese listed companies. The Theory And Practice Of Finance and Economics, Vol. 3, pp. 53-57.
[12]	WEI Gang. 1998. An empirical study on dividend distribution of China listed companies. Economics Research Journal. Vol. 6.
[13]	YUAN Hong-qi. 2001. Analysis on the dividend policy of listed companies in China. The Study of Finance and Economics. Vol. 3.
[14]	YANG Shu-e, WANG Yong, BAI Ge-ping. 2000. An empirical analysis on the factors that influence the dividend policy. Ac-counting Research. Vol. 2.
[15]	CHEN Guo-hui, ZHAO Chun-guang. 2000. Positive study on the dividends plicy option for enterprises in the stock market. Research On Financial and Economic Issues. Vol. 5.
[16]	WEI Gang. 2000. An empirical study on stock dividends of China listed companies. Securities Market Herald. Vol. 11.
[17]	LI Kun, SONG Ting-ting. 2005. The effects of stock dividends on shareholder structure and the stock liquidity. Statistics and Decision. Vol. 18.
[18]	HE Tao, CHEN Xiao-yue. 2003. A discussion on the motivation of stock dividend and transfer of reserve to common shares of china’s listed companies. Journal of Finance. Vol. 9.
[19]	KONG Xiao-wen, YU Xiao-kun. 2003. An empirical analysis on the signaling effect of listed com-panies’ dividend policy. Management World. Vol. 6.
[20]	ZHU Yun, WU Wen-feng, WU Chong-feng. 2004. Research on the information content of China listed companies’ stock dividends. Chinese Journal of Management Science Symposium. Pp. 218-222.