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Trading on stock split announcements and the ability to earn long-run abnormal returns

The aim of this study is to examine why underreaction following stock split announcements persists over the long-term. To do so, we analyze long-run abnormal returns after split announcements over the period 1975-2006. A significant abnormal return of 5% p.a. is observed over the entire dataset but this finding is not robust across sub-periods or segregations based on market cap. It is also documented that abnormal returns can be enhanced by focusing on splitting firms that have not split previously within the last three years. The key result of this study, which dominates all other findings, is that abnormal returns are conditional on whether firms split again in the next three years. Unsurprisingly, firms that split again perform very well in the year after the current split. However, for the roughly two-thirds of the sample that do not split again, the abnormal return is -11%. This suggests that the average long-term underreaction following stock split announcements is difficult to exploit.