Review of Quantitative Finance and Accounting

, Volume 26, Issue 4, pp 347–367

Do stock splits signal future profitability?

Article

DOI: 10.1007/s11156-006-7437-z

Cite this article as:
Huang, G., Liano, K. & Pan, M. Rev Quant Finan Acc (2006) 26: 347. doi:10.1007/s11156-006-7437-z

Abstract

This study examines whether stock split announcements contain information content about future profitability, measured in terms of future earnings change, future earnings, or future abnormal earnings. We find that the split announcement year has the highest earnings change and the earnings change declines substantially over the subsequent five years. Our empirical results show little evidence that stock splits are positively related to future profitability. In fact, stock splits are in general negatively related to future profitability in subsequent years after the announcement, except for dividend-paying firms with a split factor less than 0.5. This negative relation holds regardless of future profitability measure. Therefore, our empirical finding suggests that stock splits are not useful signals of a firm’s future earnings prospects.

Keywords

Stock splitsSignalingFuture profitability

Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  • Gow-Cheng Huang
    • 1
  • Kartono Liano
    • 2
  • Ming-Shiun Pan
    • 3
  1. 1.Department of Accounting and FinanceAlabama State UniversityMontgomeryUSA
  2. 2.Department of Finance and EconomicsMississippi State UniversityMississippi StateUSA
  3. 3.Department of Finance and Information Management & AnalysisShippensburg UniversityShippensburgUSA