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The Market Reaction to the Choice of Accounting Method for Stock Splits and Large Stock Dividends

Published online by Cambridge University Press:  06 April 2009

Graeme Rankine  and
Earl K. Stice
Graeme Rankine
Affiliation:
American Graduate School of International Management, 15249 N. 59th Ave., Glendale, AZ 85306
Earl K. Stice
Affiliation:
School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 2 , June 1997 , pp. 161 - 182
Copyright
Copyright © School of Business Administration, University of Washington 1997

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