Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?

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...

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Bibliographic Details
Published inFinancial management Vol. 37; no. 2; pp. 173 - 192
Main Authors Kim, Seoyoung, Klein, April, Rosenfeld, James
Format Journal Article
LanguageEnglish
Published Melbourne, Australia Blackwell Publishing Asia 01.07.2008
Blackwell Publishing
Financial Management Association
Blackwell Publishing Ltd
Subjects
Abnormal returns
Arbitrage
Business studies
Calendars
Cash flow
Corporate finance
Efficient markets
Financial management
Financial performance
Investments
Investors
Market prices
Nasdaq Composite Index
Prices
Profit
Profits
Rate of return
Short sales
Stock exchanges
Stock market delistings
Stock prices
Stock returns
Stock shares
Stock splits
Stock splitting
Stock transactions
Studies
Transaction costs
U.S.A
United States
United States > US
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Summary: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.
Bibliography:istex:33DA11EC6DBE54E368E59BA1449A720EC5721B17
ark:/67375/WNG-PMGCZFF4-Z
ArticleID:FIMA009
We would like to thank George Benston, Eugene Fama, Baruch Lev, Jay Ritter, and the workshop participants at the University of Florida and Emory University for their helpful comments and suggestions. We also thank Lan Wang for her computer support.
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SourceType-Scholarly Journals-1
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ISSN:0046-3892
1755-053X
DOI:10.1111/j.1755-053X.2008.00009.x