Behaviour of Share Prices Around Ex-Split Day of Stock Splits in India

Abstract

Stock split is a corporate decision in which company divides face value of the equity share into more than one unit. Theoretically stock splits should not have any effect on share prices and stock returns. The present study has attempted to examine the behaviour of share prices around the ex-split day of the stock splits announcement. This effect of stock splits announcements on the share prices is studied by analysing the behaviour of abnormal returns around stock splits of 304 companies listed on BSE, during the period 1999 to 2018. The analysis stresses on finding whether stock splits have an impact on share prices. This impact of stock splits is studied using abnormal returns. The event study is a methodology used to study share price behaviour around specific events and share price reaction to such events as stated by Binder (1998). This effect has been analysed around the event - ex-split day. To test the impact of stock splits - AAR (Average Abnormal Returns) and ACAR (Average Cumulative Abnormal Returns) are computed.

The presence of positive AARs with significant Z_s -values on t-1 day in pre- ex-split day window implies that informed traders anticipating a price increase on ex-split day buy shares before the ex-split day to make fast profit. In post-ex-split day window positive AARs with significant Zs-values are present on t+1 day probably because of lower share prices after ex-split day. The AARs are negative with significant Z_s -values in post event window till t₊₁₇ . It implies that in the Indian stock market there is presence of significant negative wealth effect in post ex-split day window not in line with findings of Angel (1997) and Schultz (2000). ACARs are negative and continuously decreasing throughout the event window. The statistical significance of ACARs is tested using Z-statistic. The ACAR do not have significant Z-value in the event window.

Significant abnormal returns were found to be present around the ex-split day though for a very short duration of time. The current study suggests that the investors while planning their investment or trading portfolio, must decide a time horizon for a stake in shares subjected to split, so that they take advantage of the fact that share prices do not adjust fully in proportion to split ratio immediately on and after ex-split day. The benefit must be availed quickly since the impact of stock splits is found to be present for a short time duration.