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Livedoor, a famous Japanese IT company, experienced rapid growth through the overuse of a stock split strategy. Because of this strategy, the company faced a criminal investigation for suspicion of account rigging in January 2006. In this paper, I examine whether the Japanese stock split bubble burst not only because of system reform to make newly issued shares tradable on their ex-dates, but also because of the Livedoor shock. To explore this possibility, I evaluated data that were classified into specific categories: stock splits under the old system’s conditions that prevented the trade of newly issued shares for about 50 days following the ex-date, stock splits under the new system’s conditions, and news announced before and after the Livedoor shock. I estimated abnormal returns for each stock on their respective announcement dates. Results demonstrate that under the old system, trading restrictions for newly issued shares caused increases in stock prices, but the Livedoor shock stalled these increases for split stocks. These results suggest that the stock split bubble burst not only because of system reform but also because of changes in investor sentiment with regard to split stocks.

The Japan Stock Split Bubble and the Livedoor Shock