Stock Splits Puzzle: An Additional Answer From Pre-Split Earnings Announcements

Abstract

If stock splits are used by managers to convey private information to the public, we hypothesize that the information content of splits should be related to the information managers reveal during quarterly earnings announcements. Supporting this hypothesis, we find that post-split stock returns and operating earnings growth are positively correlated with the 5-day returns around the last earnings announcement prior to the splits. This relationship holds even after controlling for different characteristics, including size, book-to-market, and momentum. These findings add new evidence to the rich literature on the signaling hypothesis regarding the motivation behind this corporate event.