Working Paper Series, Department of Finance, Copenhagen Business School
Ken L. Bechmann and Johannes Raaballe
The Differences Between Stock Splits and Stock Dividends
Abstract: It is often asserted that stock splits and stock dividends
are purely cosmetic events. However, many studies have documented several
stock market effects associated with stock splits and stock dividends. This
paper examines the effects of these two types of events for the Danish
stock market. Consistent with the existing literature, the two events are
associated with a significantly positive announcement effect of
ap-proximately 2.5%. However, when examining the two events more carefully,
several important results are obtained. First, a firm's motivation for
announcing the two events is completely different. Second, the positive
stock market reaction is closely related to associated changes in a firm's
payout policy, but the relationship varies for the two types of events.
Finally, there is only very weak evidence for a change in the liquidity of
the stock. On the whole, after controlling for the firm's payout policy,
the results suggest that a stock split is a cosmetic event and that a stock
dividend on its own is considered negative news.
Keywords: Stock splits; Stock dividends; Cash dividends; Signaling; Liquidity; (follow links to similar papers)
JEL-Codes: G14; G32; G35; (follow links to similar papers)
32 pages, March 10, 2004
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