Forward and Reverse Stock Splits: A Test of Market Efficiency

Abstract

The purpose of this study is to utilize the risk adjusted event study methodology to test the magnitude and timing of any effect that a stock split announcement has on a firm’s stock price. By analyzing market reactions of 50 NYSE or NASDAQ stock splits and comparing them to the corresponding dates’ S&P 500 performance, it is possible to determine if investors are able to earn above normal risk adjusted returns by acting on public announcements. The results suggest that investors would not be able to make atypical returns on the announcement of stock splits, supporting semi-strong form market efficiency.