Get access

Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions


  • We thank Pierluigi Balduzzi, Rich Evans, Wayne Ferson, Cliff Holderness, Edith Hotchkiss, Brandon Julio, Ed Kane, Joe Peek, Jeff Pontiff, Jun Qian, Phil Strahan, Hassan Tehranian, and seminar participants at Boston College and the 2005 Financial Management Association Meetings for helpful comments. We are especially grateful to an anonymous referee and Bill Christie (the editor) for suggestions that significantly improved this paper. We also thank Jill Kirby and Jacquelyn Thompson for editorial assistance. All remaining errors are our own.


We document that acquiring firms are more likely than nonacquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long-run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock-swap acquisitions. This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.