Stock Splits Performance Post-announcement: Understanding the Market Reaction and Its Impact

Stock splits can be a game-changer for investors, but what happens to the stock's performance after the announcement? Studies have shown that stocks tend to outperform the market in the year following a split, with an average return of 4.6% higher than the S&P 500.

In the period preceding the split, stocks tend to underperform the market, with an average return of 2.8% lower than the S&P 500. This is often referred to as the "split-induced underperformance" effect.

Stock splits don't seem to have a significant impact on a company's performance. In fact, a study by Sekera found that stock splits are just cosmetic, changing the proportionate amount of ownership each share represents, but not the economic value of the company.

The three stocks with the highest returns after a split were DexCom, Paccar, and Charter Communications. DexCom's stock gained 71.45% in the year following its split, while Paccar's stock had a return of 50.4% one year after its split in February 2023.

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Not all stocks perform well after a split, however. The three stocks with the lowest post-split returns were CoStar Group, Intuitive Surgical, and CF Industries Holdings. CoStar's stock fell 31.64% after its split in June 2021, while CF Industries' stock lost 53.78% over the next year after its split in June 2015.

Stock performance after a split can be a mixed bag. In fact, research suggests that stock splits are just cosmetic and don't change the economic value of a company.

Of the 54 stocks that split in the last 10 years, 18 saw an increase of 0.1%-20.0% in price, while 12 saw a decrease of 0.1%-15.0%. This lack of trend suggests that stock splits may not have a significant impact on a company's performance.

Some stocks, however, do seem to benefit from splits. DexCom, for example, gained 71.45% in the year following its 2022 split, while Paccar split in February 2023 and one year later had a return of 50.4%, double the gain on the S&P 500.

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On the other hand, some stocks experience a decline in performance after a split. CoStar Group, for instance, fell 31.64% after its 2021 split, while Intuitive Surgical had a subsequent one-year loss of 37.75%.

Research also shows that stock splits can have a positive impact on a company's performance in the long run. A study by Hamang Desei and Prem Jain found that, on average, the 1 and 3-year buy and hold abnormal returns after a stock split announcement are 7.05% and 11.87%, respectively.

It's worth noting that not all stocks perform well after a split. In fact, only 50.8% of the stocks in a study by Schaeffer's Investment Research beat the S&P 500 after a split.

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A stock split is a corporate action that divides existing shares into multiple new shares, increasing the number of outstanding shares while reducing the price per share. The primary goal is to make the company's shares more affordable to a broader range of investors and improve liquidity in the stock.

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Here's how a stock split typically works: on the designated effective date, existing shareholders receive additional shares for each share they already own according to the predetermined ratio. For example, in a 2-for-1 stock split, shareholders would receive two new shares for every one old share they held.

The stock's market price is adjusted accordingly after the split. If it was trading at $100 per share before a 2-for-1 split, it would likely start trading at around $50 per share after the split.

Stock splits are often seen as a positive sign by investors, but the fundamental value of the company remains the same.

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Stock prices can reach an optimal balance after a split, improving accessibility without altering underlying value.

This balance is often achieved due to increased liquidity perceived by investors, which can lead to a reversion in stock prices.

Investors may not always see sustained market performance post-split, despite the increased liquidity.

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Stock prices tend to climb by approximately 4% in the week following a split announcement, driven by the market's perception of increased liquidity and accessibility for smaller investors.

This phenomenon is based on Goldman Sachs' examination of 45 stock splits within the Russell 1000 since 2019.

The market's immediate reaction is often a result of investors' enthusiasm for the perceived benefits of a stock split, rather than a fundamental change in the company's financials.

In fact, Goldman Sachs found that the majority of these splits resulted in a price surge, illustrating the market's tendency to react positively to such announcements.

However, this initial spike is often short-lived, as the positive impact tends to revert by the effective date of the split.

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Stock splits can be a significant indicator of a company's future prospects. The management team often uses stock splits as a signaling mechanism to convey their confidence in the company's stock price.

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By splitting shares, the stock price drops, and the share count rises, which can signal to investors that the company believes its stock will soon rise back to the pre-split price. This can be a promising sign for investors.

Stock splits can also improve liquidity by allowing smaller traders access to buy and sell shares. However, the rise of fractional-share trading has likely reduced this impact.

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Stock splits can be a double-edged sword for investors. Market dynamics play a significant role in determining the performance of a stock post-announcement.

Reaching an optimal balance in stock prices can improve accessibility without significantly altering underlying value. This can lead to increased liquidity, which investors perceive as a positive sign.

However, this increased liquidity doesn't always translate into sustained market performance post-split.

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Stock prices can sometimes reach an optimal balance, which improves accessibility without significantly altering the underlying value.

This balance can be a result of investors perceiving increased liquidity, but that doesn't always translate into sustained market performance post-split.

Investors may see a temporary boost in market performance due to the increased liquidity, but it's essential to look beyond the surface level to understand the underlying dynamics.

In some cases, the market may revert to its original state after the initial excitement dies down, leaving investors with a mixed bag of results.

Liquidity Considerations can be a bit of a misnomer. Stock splits theoretically enhance liquidity by making shares more affordable.

Goldman Sachs cautions that actual liquidity improvements may not be as significant as perceived. This is because the initial increase in trading activity often stabilizes, with liquidity reverting to pre-split levels.

In other words, the initial boost in liquidity from a stock split is often short-lived.

Stock splits can have a significant impact on the trading behavior of investors. On average, splitting a security does not necessarily increase liquidity or attract investors' interest proportionally to the ratio at which the security was split.

Research shows that stock-split events can drive additional participation from retail investors, especially in securities with larger market capitalization. This increased participation can lead to a change in market structure behavior.

The week before the effective date of the split was used as the "pre-split" period, and it was found that stock splits can have an adverse effect on the notional value traded on the securities in some cases.

Stock splits can have a significant impact on market behavior, especially in the short term.

Research shows that splitting a security does not necessarily increase liquidity or attract investors' interest proportionally to the ratio at which the security was split.

In fact, some stock splits have an adverse effect on the notional value traded on the securities.

However, stock-split events do drive additional participation from retail investors, especially in securities with larger market capitalization.

This increased participation from retail investors can be observed in the immediate week after the split becomes effective and up to six months following.

The team analyzed how stocks trade differently in this time period, measuring changes in market structure behavior via a basket of metrics: volume, retail volume, notional exposure, trade size, odd-lot volume, and volatility.

A stock split is a corporate action that increases the number of outstanding shares while proportionally decreasing the share price. This is typically done to make the stock more affordable and enhance liquidity.

Research shows that a stock split trading strategy can outperform buy and hold, contrary to the efficient market hypothesis. This suggests that there's value in analyzing corporate actions like stock splits.

A stock split works by increasing the number of outstanding shares, which proportionally decreases the share price. For example, if a company splits its stock 2-for-1, the number of shares outstanding doubles, and the share price is cut in half.

Stock splits can have a significant impact on a company's stock price, making it more attractive to investors. This is because the lower share price can make the stock more affordable and accessible to a wider range of investors.

A stock split trading strategy involves analyzing corporate actions like stock splits to identify potential trading opportunities. This can be a valuable approach for investors looking to outperform the market.

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