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Do stock splits signal future profitability?

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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.

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Authors and Affiliations

  1. Department of Accounting and Finance, Alabama State University, Montgomery, AL, 36101-0271, USA

    Gow-Cheng Huang

  2. Department of Finance and Economics, Mississippi State University, Mississippi State, MS, 39762, USA

    Kartono Liano

  3. Department of Finance and Information Management & Analysis, Shippensburg University, Shippensburg, PA, 17257, USA

    Ming-Shiun Pan

Authors
  1. Gow-Cheng Huang
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  2. Kartono Liano
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  3. Ming-Shiun Pan
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Correspondence to Ming-Shiun Pan.

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JEL Classification G30

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Huang, GC., Liano, K. & Pan, MS. Do stock splits signal future profitability?. Rev Quant Finan Acc 26, 347–367 (2006). https://doi.org/10.1007/s11156-006-7437-z

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  • DOI: https://doi.org/10.1007/s11156-006-7437-z

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