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Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?
Author(s) -
Kim Seoyoung,
Klein April,
Rosenfeld James
Publication year - 2008
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2008.00009.x
Subject(s) - stock (firearms) , arbitrage , business , monetary economics , profit (economics) , economics , abnormal return , financial economics , finance , microeconomics , stock exchange , mechanical engineering , engineering
We examine the long‐run return performance of over 1,600 firms with reverse stock splits. These stocks record statistically significant negative abnormal returns over the three‐year period following the month of the reverse split. The sample firms experience poor operating performances over the four years that include and follow the year of the reverse split, which suggests informational inefficiencies. Because these stocks have unique financial characteristics, we also show that they would be very difficult to sell short. Thus, arbitrageurs would be restricted in their ability to earn abnormal profits, even if they correctly anticipated a price decline.