Stock Split Factors as a Signaling of Firm's Future Earning: Empirical Evidence from the Stock Exchange of Thailand

Abstract

Because there is no effect on the firm’s value due to the stock dividend and stock split transaction (SD) in accounting viewpoint, it has been a puzzle over the incentives of the firm to make these transactions. In this paper, the stock split and stock dividend transactions are collected from stock exchange of Thailand. This paper find that split factor choice are increasing with share price, earning forecast error, operating performance improvement and decreasing with the firm’s size. It can be concluded that management convey private information about future earnings via the split factor choice. Furthermore, after analyzing the relationship between the announcement return and the signaling by the firm, the study finds the positive relationship of them and the results suggest that investors may infer the firm value corresponding to the split factor choice. However, the forecast error and operating performance improvement, which use to be a proxy for the signaling hypothesis has no statistical association with return during the announcement. The result provides a strong positive association between SD announcement return and the 6-month liquidity improvement. It suggests that liquidity hypothesis has an explanatory power to explain the SD announcement return. The results imply that investors utilize the SD announcement as signal for the future liquidity improvement not for the signaling hypothesis.