The market reaction to the choice of accounting method for stock splits and large stock dividends

Graeme Rankine, Earl K. Stice

    Research output: Contribution to journalArticlepeer-review

    46 Scopus citations

    Abstract

    Prior research has used inaccurate classification rules to distinguish between stock splits and stock dividends. The CRSP classification of two-for-one stock distributions agrees with the actual accounting treatment only 23% of the time. In addition, the accounting treatment impacts the announcement period reaction - two-for-one distributions accounted for as stock dividends are associated with five-day announcement period returns of 2.70%, significantly greater that the 0.93% announcement returns for distributions accounted for as stock splits. Announcement returns are positively related to earnings growth in the two years following the distribution for stock dividend firms but not for stock split firms. The accounting choice appears to be used to confirm management's private information about future earnings revealed at the time of the distribution announcement.

    Original languageEnglish (US)
    Pages (from-to)161-182
    Number of pages22
    JournalJournal of Financial and Quantitative Analysis
    Volume32
    Issue number2
    DOIs
    StatePublished - Jun 1 1997

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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