Empirical analysis of the impact of stock splits on stock performance in the American stock market during the COVID-19 sanitary crisis (2020-2022)

Abstract

Stock splits refer to a corporate action taken by management and approved by shareholders that aims to boost a stock’s liquidity and therefore its accessibility to a wider pool of investors through making said stock available in a lower denomination, but otherwise has no impact on the company’s market cap nor does it dilute the ownership stakes of existing investors.

For these reasons, stock splits have been known to broadcast positive signals to a splitting company’s environment as it carries with it a sense of confidence in the company’s prospects, and therefore stock splits are assumed to influence stock performance in a variety of ways, through them taking effect or simply by the mere fact of their announcement, such comprises the base hypothesis that this paper aims to study.

A comprehensive  research paper published in 1996 by David L. Ikenberry, Graem Rankine and Earl K. Stic entitled: “What do stock splits really signal?” which examined 1250 stock splits in the 1990s and studied their impact on stock performance compared to the overall market has concluded that over a one-year interval, splitting companies have outperformed the market by close to 8% on average, and therefore came to the conclusion that a strong link exists between stock splits and positive excess return for stock splitting companies over the market reference index.

This paper covers a different context, one that takes place over 2 decades later and has been marked by the COVID-19 pandemic crisis, and through the analysis done as part of this paper - which covered 55 companies over 2 and a half years (split into three data sets and put against the S&P 500 market index) - has come to the conclusion that no such meaningful relationship exists between splits and excess returns during the studied period, both on announcement and effective dates, with average short-term results ranging from 1.8% to 2.9% at best, and negative long-term average returns ranging from -8.1% to -2.3%. (It is also worth mentioning that, on their own, stock splitting companies achieved a 12.7% average return after one year, but still failed to beat the market index).

The large cap-only analysis set shows a reversed picture: inferior short-term average returns (both for effective and announcement dates) but superior long-term average returns (In the case of the effective date they still fell short of the market index, but managed to slightly outperform it by a 2.6% margin).

Keywords: Stock Splits, American stock market,Stock performance, S&P 500, COVID-19

JEL Classification : G10, G14, G3

Paper type : Empirical analysis