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Stock Splits and Bond Yields: Isolating the Signaling Hypothesis
Author(s) -
Michayluk David,
Zhao Ruoyun
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00252.x
Subject(s) - stock (firearms) , corporate bond , bond , economics , earnings , financial economics , stock price , econometrics , bond valuation , stock market bubble , stock market , monetary economics , finance , biology , mechanical engineering , paleontology , horse , series (stratigraphy) , engineering
One explanation offered for stock splits is that the split signals positive information by reducing the stock price range in expectation of improved future prospects. Price declines also lead to changes in stock price dynamics, but related securities are not subject to these other changes and therefore can be used to provide a separate assessment of the markets’ interpretation of the split. We examine corporate bond issues around stock splits and find a significant decline in the bond yield spread following stock splits, supporting the signaling hypothesis. We also confirm improvements in forecasted and realized earnings subsequent to stock splits.