The purpose shares split is to divide nominal value in given proportion eg. 2:1, 5:4 etc, what hat involves the proportional reduction of the price Splits are conducted on shares, both traded public and in private turnover. From the rational point of view split should have no other consequences for investors and for share price and should be treated as a cosmetic correction. For shareholders, split changes a nominal amount of shares, but it does not change the value of portfolio. Shareholders rights, Cash Flow and equity of company stay unchanged.
In the history of the world stock exchanges the first shares splits took place in 1927. The earliest research is dated 1933 (Doodley 1933), but the top of popularity splits reached recently, since the ’90. Easley, O”Hara, Saar (2001) report that the most of splits took place in 1997 on NYSE, when about 235 companies made a split. On average about 10% of firms decide each year to lower the share price. Some of companies made a split for many times as e.g. Johnson & Johnson (6 splits since 1970), Bouygues (12 splits since 1979) etc.
The main question of researchers, investors and companies is ” why to make a split?”. Still the explicit motive of split is unknown. There are many hypothesis and case studies in the literature. All appearing hypothesis are clustered around some periods of time. In history of splits there are three main groups to be distinguished:
•Since ’30 up to ’70 - from splits appearance to the market transformation during fuel crisis
•Since ‘70 up to 1998 - form the development of modern financial instruments to the crisis of new technology companies
•Since 1998 up to now and more
Given above classification concerns mainly U.S. market, the most developed one in the world. But one should remember, that this market serves as a indicator of investments mood. It gives a direction of development and influences trends all over the world. So, everything what happens on the U.S. market is also about the rest of the world, but with some time lag.
Table of Contents
Introduction
1. Share splits hypothesis
1.1 Hypothesis about signaling good perspectives
1.2 Hypothesis of attracting investors
1.3 Hypothesis of optimal price range
1.4 Hypothesis of increase in liquidity
1.5 Hypothesis of split as a marketing tool
2. Analysis of share splits in Poland
3. Methodology
3.1 Zero order models
3.2 First order models
3.3 Shifts and Pulses
4. Share splits on Warsaw Stock Exchange – estimation results
5. Conclusions
Research Objectives and Key Topics
The primary objective of this paper is to examine the impact of share splits on stock performance and investor behavior within the context of the Polish Stock Exchange. By applying intervention analysis and a modified Capital Asset Pricing Model (CAPM), the study evaluates whether stock splits serve as informational signals or purely cosmetic price adjustments, while comparing the observed market reactions against established theoretical hypotheses.
- Theoretical analysis of common share split hypotheses (signaling, liquidity, optimal price range).
- Econometric modeling of intervention effects on security prices and trading volumes.
- Evaluation of market efficiency regarding split-related information disclosure.
- Comparative analysis of investor sentiment and reactions between the Polish market and more developed international exchanges.
Excerpt from the Book
1.1 HYPOTHESIS ABOUT SIGNALING GOOD PERSPECTIVES
In the recent years, one of the well-known hypotheses binds split and the process of signaling good perspectives (Fernando, Krishnamurthy, Spindt, 1999). When a company lowers its security prices, it can mean that the growth in share price should be expected. It is a way to give investors some good news (Desai, Jain, 1997), which are often private and even confident (Brennan, Copeland, 1988). This information may concern the expected abnormal profits (Copeland, 1979). In some research such correlation between abnormal returns and splits was proved (Fama, Fisher, Jensen, Roll (1969), Asquith, Healy, Palepu (1989)). Announcement of good sights is not idle. Ikenberry, Rankine, Stice (1996) proved, that companies making split were better off at about 7% in one year after split and 12% in three years after split than companies without split. That all means that it is not a split that increases stock price, but is serves as a information instrument.
In the literature there are also some research, which shake this theory. Fama, Fisher, Jensen, Roll (1969) presented the results of 940 splits in 1927-1959 on base of U.S. monthly data. This survey showed a correlation between split and abnormal returns. The point is the sequence it appeared. There were abnormal returns of about 34% in the period of 30 months before split, but there were no abnormal returns after the split. Similar results obtained Lakonishok, Lev (1987). On base of daily data for 1015 splits in 1963-1982 they proved that for 5 years before split abnormal profits were about 53%, but they disappeared after split. It may be interpreted, that splits are executed after good times and have no influence on share price. On this base there were made another hypothesis about an optimal price range. Abnormal profits causes an increase in security price. Split is an instrument to reduce price to its optimal level. This is also called benchmark price hypothesis.
Summary of Chapters
Introduction: This chapter defines the mechanics of share splits as a nominal value adjustment and provides an overview of the global history and varied motivations behind these corporate actions.
1. Share splits hypothesis: This section reviews the academic literature regarding the primary drivers for splitting shares, including signaling good perspectives, attracting investors, maintaining optimal price ranges, increasing liquidity, and acting as a marketing tool.
2. Analysis of share splits in Poland: This chapter contextualizes share splits within the Polish regulatory framework and provides descriptive statistics regarding the frequency of splits in the Polish market between 1991 and 2002.
3. Methodology: This section details the econometric approach, specifically the use of intervention analysis (zero and first-order models) and a modified CAPM to measure the market impact of corporate events.
4. Share splits on Warsaw Stock Exchange – estimation results: This chapter presents the empirical findings, indicating that share splits on the Warsaw Stock Exchange generally trigger neutral or negative investor reactions, challenging standard efficiency models.
5. Conclusions: The final chapter synthesizes the findings, concluding that the Polish market exhibits unique investor behavior resistant to standard psychological manipulation through share splits.
Keywords
Share splits, Polish Stock Exchange, market performance, intervention analysis, CAPM, abnormal returns, market efficiency, investor behavior, signaling hypothesis, benchmark price, liquidity, stock prices, financial econometrics, market psychology, information noise.
Frequently Asked Questions
What is the primary focus of this research?
The research investigates the influence of share splits on security prices and investor behavior specifically within the Polish Stock Exchange, comparing these findings to established global market theories.
What are the central themes discussed in the paper?
The study centers on the theoretical motives behind share splits, the econometric methodology for identifying market interventions, and the empirical reception of these splits by Polish investors.
What is the main research question or objective?
The core objective is to determine whether share splits on the Polish market serve as meaningful information signals or if they are simply cosmetic price adjustments, and to analyze how Polish investors react to such events.
Which scientific methods are employed in the study?
The authors use intervention analysis—specifically zero-order and first-order models—and a modified Capital Asset Pricing Model (CAPM) to evaluate the impact of splits on stock returns and trading volumes.
What content is covered in the main body of the paper?
The main body covers a comprehensive review of existing share split hypotheses, an analysis of the Polish regulatory environment for splits, a detailed econometric methodology, and a presentation of empirical results from the 1991-2002 period.
Which keywords best describe this study?
Key terms include Share splits, Polish Stock Exchange, intervention analysis, market efficiency, signaling hypothesis, and abnormal returns.
How does the Polish market differ from developed markets regarding share splits?
Unlike developed markets where splits are often seen as positive signals or marketing tools, the study finds that Polish investors largely react with indifference or negativity, suggesting a lack of market psychology-driven manipulation.
What does the empirical data suggest about the efficiency of the Polish Stock Exchange?
The authors argue that the high percentage of neutral market reactions (65%) paradoxically suggests that the Polish market is efficient, as it does not succumb to the artificial "good news" signaling typically associated with splits in other regions.
- Quote paper
- Katarzyna Kopczewska (Author), Tomasz Kopczewski (Author), 2005, Share Split and Market Performance - Case of Polish Stock Exchange, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/52848
