Are stock splits credible signals? Evidence from the Singapore market
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This paper studies the effects of stock splits on returns using daily data from the Singapore Stock Exchange over the period 1983-2000. Specifically, it examines whether stock split announcements provide credible signals due to asymmetry of information. We find that the market, on average, responds positively and significantly to announcements of stock splits. We then partition the sample into sub-samples: one with dividends (earnings) increasing firms and another with dividends (earnings) decreasing firms the 12 month period after the stock split. Both groups respond positively to stock split announcements on the event period, which initially casts doubt on the signaling hypothesis. Additional tests show that the difference between the cumulative average returns of the two sub-samples is significantly positive during the post-event and/or full-test period. An implication of this finding is that the market can differentiate ex ante between the two sub-samples, which lends support to the hypothesis that stock split announcements generally provide credible signals of future prospects.
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