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Stock Splits and Bond Yields: Isolating the Signaling Hypothesis

Authors

  • David Michayluk,

    Corresponding author
    1. School of Finance and Economics, University of Technology, Sydney
      Corresponding author: School of Finance and Economics, University of Technology, Sydney, PO Box 123, Broadway, NSW Australia 2007; Phone: +61-2-9514-7761; Fax: +61-2-9514-7711; E-mail: david.michayluk@uts.edu.au.
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  • Ruoyun Zhao

    1. School of Finance and Economics, University of Technology, Sydney
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  • We would like to thank Don Brean, Raymond Kan, Tom McCurdy, Lance Nail and Alan White for helpful suggestions on an earlier draft. We also thank seminar participants at the 2006 Asian Finance Association meeting in Auckland, New Zealand and the 2006 Southern Finance Association meeting in Destin, Florida for their comments and suggestions. Special thanks to an anonymous referee and a former editor, Arnie Cowan. All remaining errors are our responsibility.

Corresponding author: School of Finance and Economics, University of Technology, Sydney, PO Box 123, Broadway, NSW Australia 2007; Phone: +61-2-9514-7761; Fax: +61-2-9514-7711; E-mail: david.michayluk@uts.edu.au.

Abstract

One explanation offered for stock splits is that the split signals positive information by reducing the stock price range in expectation of improved future prospects. Price declines also lead to changes in stock price dynamics, but related securities are not subject to these other changes and therefore can be used to provide a separate assessment of the markets’ interpretation of the split. We examine corporate bond issues around stock splits and find a significant decline in the bond yield spread following stock splits, supporting the signaling hypothesis. We also confirm improvements in forecasted and realized earnings subsequent to stock splits.

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