Impact of splits on stock splits ratios around announcement day: empirical evidence from India

Abstract

Stock split should not have any impact on share prices, and there should be no value creation. The purpose of this study is to find any impact of stock splits announced in India between 1999 and 2019 on stock returns. The study aims to find differences in the impact of stock splits on stock returns with differences in stock split ratios. To examine the impact, the study includes 224 splits and adopts the standard event study methodology to find results. The presence of an abnormal return around split announcement day is the main factor, which determines the impact of stock split on the stocks. Average Abnormal Returns and Cumulative Average Abnormal Returns on percentage basis, z-test and p-value are used to statistically analyze the impact on stock prices around the announcement day of splits. These tests are used across different window periods (e.g., 20 days, 10 days and 5 days) around the event day (announcement day) to check if the impact of the event continues or decreases over time. The results point to a significant positive impact of stock splits on the returns of stock around the day the split was announced. The results also show that the impact is stronger for stock splits with ratios 10:1 (2.72 percent) and 10:2 (2.14 percent). It can be suggested that 10:1 and 10:2 are the most popular split ratios that receive maximum ongoing response to splits in the announcement window.

Keywords

• abnormal returns
• announcement day
• event study
• split factor
• trading range