Abstract:

This paper examines the market reaction to the abolition in 2001 of the minimum ¥50,000 net asset value (NAV) per share required for stock splits in Japan. Using pre-split NAV levels for a sample of 321 splits from 2002 to 2005, we find that split announcements are associated with statistically significant positive abnormal returns regardless of the level of NAV, which is consistent with the fixed-signalling hypothesis. However, we find that high-NAV firms significantly out-perform low-NAV firms after the new law passed, thus suggesting a lower signalling effect in low-NAV splitting firms. Our empirical findings confirm that the market strongly reacts to relevant information on neglected firm, but fail to show empirical support to the value of the strength of the split signal, thus refuting the trading price range hypothesis. Based on a sub-sample, we find that the post-split trading volume increases in percentage of the total shares outstanding, thus providing support to the liquidity hypothesis. Interestingly, further investigations show that splitting firms with a higher NAV and a smaller size (or higher split ratio) have a higher market reaction at the time of the news. This suggests that investors do consider the level of the NAV in their trading strategies around stock split announcements.