Do Reverse Stock Splits Benefit Long-term Shareholders?

Hwang, J. K.; Dimkpah, Young; Ogwu, Alex I.

doi:10.1007/s11294-012-9370-3

Cited by 8 publications

(6 citation statements)

References 7 publications

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“…Although Hwang, Dimkpah, and Ogwu () report that the mean institutional holding of large capitalization stocks increases after the reverse stock split, they neither analyze a mechanism through which the reverse stock split changes institutional investment nor show whether their results are statistically significant.…”

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confidence: 98%

Reverse Stock Splits, Institutional Holdings, and Share Value

Chung¹,

Yang

2014

Financial Management

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We show that both the number of institutional investors and the percentage of shares that are held by institutional investors increase significantly after reverse splits with a presplit price lower than $5 and a target price higher than $5. This effect is larger than for other comparable reverse splits. These results suggest institutional holdings are affected by the prudent-person rule and reverse splits are used by firms to alleviate this constraint. We also show that an increase in institutional holdings that results from reverse splits is associated with an increase in share price.Despite its frequent occurrence, the reverse stock split has been the subject of relatively few studies. In this paper, we shed further light on the causes and consequences of the reverse stock split by analyzing its effects on institutional holdings and shareholder wealth using data from 1980 through 2010 for a large sample of reverse stock splits in the US markets.The level of institutional ownership in US companies has risen significantly in recent decades and corporate managers are paying increasingly greater attention to institutional preference to attract more institutional investments in their stocks. 1 Prior research shows that institutional investors are more likely to hold stocks of companies with higher share prices and larger market capitalizations (Faulkenstein, 1996;Gompers and Metrick, 2001), higher quality ratings (Del Guercio, 1996), better governance structures (McCahery, Sautner, and Starks, 2010; Chung and Zhang, 2011), stable payout policies (Grinstein and Michaely, 2005), better managerial performances (Parrino, Sias, and Starks, 2003), and higher pay-for-performance sensitivity (Hartzell and Starks, 2003). The present study offers new insight into institutional preference by analyzing the effect of the reverse stock split on institutional holdings.Anecdotal evidence suggests that companies use reverse splits as a means to expand and broaden their investor base by attracting more institutional investors and financial analysts. For example, Martin Brauns, chairman and chief executive officer (CEO) of Interwoven Inc., stated that, "We believe that the reverse stock split will position our stock in a price range more attractive to a broader range of institutional investors . . . Realigning our share base is one more step in our process of delivering long-term shareholder value." 2 More recently, Vikram Pandit, CEO of Citigroup, told shareholders that its recent announcement of a 1-for-10 reverse stock split willWe are grateful to an anonymous referee, Marc Lipson (Editor), and Laura Starks for their valuable comments and suggestions. We also thank Maria Kasch, Kenneth Kim, session participants at the FMA annual conference, and seminar participants at the State University of New York at Buffalo for useful comments and discussions. We are solely responsible

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confidence: 98%

Reverse Stock Splits, Institutional Holdings, and Share Value

Chung¹,

Yang

2014

Financial Management

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“…Investors often interpret reverse splits as desperate measures to meet the minimum listing requirements of stock exchanges (Martell and Webb, 2008). Unlike stock splits, there is a debate on whether abnormal returns after reverse splits are positive or negative (Hwang et al, 2008;Hwang et al, 2012).…”

Section: Stock and Reverse Splitsmentioning

confidence: 99%

“…Studies show that most companies do not survive reverse stock splits Thompson, 2014, 2016;Crutchley and Swidler, 2015). On the other hand, a reverse split improves stock liquidity (Lamoureux and Poon, 1987;Han, 1995), reduces volatility (Koski, 2007), reduces the total risk of securities returns (Peterson and Peterson, 1992), generates positive signals to the market (Masse et al, 1997), reduces transaction costs and helps investors buy stocks on a margin (Hwang et al, 2012). In addition, Chung and Yang (2015) show that both the number of institutional investors and the percentage of shares held by institutional investors increased significantly after the reverse split.…”

Section: Market Reaction To Stock Splitmentioning

confidence: 99%

Stock splits and reverse splits in the Brazilian capital market

Almeida,

Pimenta Júnior,

Gaio

et al. 2024

JEFAS

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PurposeThis study aims to evaluate the presence of abnormal returns due to stock splits or reverse stock splits in the Brazilian capital market context.Design/methodology/approachThe event study technique was used on data from 518 events that occurred in a 30-year period (1987–2016), comprising 167 stock splits and 351 reverse stock splits.FindingsThe results revealed the occurrence of abnormal returns around the time the shares began trading stock splits or reverse stock splits at a statistical significance level of 5%. The main conclusion is that stock split and reverse stock split operations represent opportunities for extraordinary gains and may serve as a reference for investment strategies in the Brazilian stock market.Originality/valueThis study innovates by including reverse stock splits, as the existing literature focuses on stock splits, and by testing two distinct “zero” dates that of the ordinary general meeting that approved the share alteration and the “ex” date of the alteration, when the shares were effectively traded, reverse split or split.

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“…Ukuran perusahaan menggambarkan pengalaman serta kemampuan dari suatu perusahaan dalam mengelola dana dari pemegang saham serta menujukkan level risiko yang harus dihadapi. Penelitian (Hwang, Dimkpah and Ogwu, 2012) menemukan terdapat commulative abnormal return positif dari bulan 13 ke 36 baik pada perusahaan berukuran kecil maupun perusahaan berukuran besar. Juga terdapat perbedaan abnormal return antara saham dengan ukuran perusahaan kecil dan besar.…”

Section: Pendahuluanunclassified

Analisis Stock Split Berdasarkan Ukuran Perusahaan dan Market to Book Ratio Saham di Bursa Efek Indonesia

Susilawati¹,

Soehartono²,

Martono³

2022

jmas

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A stock split is a corporate action aimed at increasing trading liquidity. Where is carried out when the stock price is overvalued and reduces the ability of investors to buy the stock. The announcement of the stock split contains information that will be responded positively by investors. Company size and market to book ratio are company characteristics that can have an impact on investor response. Therefore, this study aims to analyze the difference in abnormal returns before and after the stock split by considering the size of the company and the market to book ratio. The research sample is a company that did a stock split in 2005-2019 with a total sample of 117 stocks. The results show that there is no difference in abnormal returns before and after the announcement of the stock split in companies with large and small sizes. However, there are differences in abnormal returns in medium-sized companies. Meanwhile, based on the market to book ratio, both companies with high and low market to book ratios have differences in abnormal returns before and after the announcement of the stock split.

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Do Reverse Stock Splits Benefit Long-term Shareholders?

Cited by 8 publications

References 7 publications

Reverse Stock Splits, Institutional Holdings, and Share Value

Reverse Stock Splits, Institutional Holdings, and Share Value

Stock splits and reverse splits in the Brazilian capital market

Analisis Stock Split Berdasarkan Ukuran Perusahaan dan Market to Book Ratio Saham di Bursa Efek Indonesia

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