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A Behavioral Signaling Explanation For Stock Splits: Evidence From China, Chenyu Cui, Frank Weikai Li, Jiaren Pang, Deren Xie
A Behavioral Signaling Explanation For Stock Splits: Evidence From China, Chenyu Cui, Frank Weikai Li, Jiaren Pang, Deren Xie
Research Collection Lee Kong Chian School Of Business
We propose a behavioral signaling explanation for the positive announcement effects of stock splits. There are two key behavioral ingredients in our model. First, (retail) investors have misconceptions about stock splits that make them view stock splits as good news. Second, investors are loss-averse and will be particularly disappointed if a splitting firm’s ex-post performance falls short of expectation. In a separating equilibrium, only managers with favorable private information use stock splits to signal. Using a comprehensive sample of stock splits in China over the period of 1998 to 2017, we find supporting evidence: (1) stock splits elicit positive announcement …