Accounting variables, stock splits and when-issued trading

When-issued trading, the contractual agreement for the sale and purchase of shares to be issued in the future (when-issued securities), typically occurs after stock split announcements. Curiously, when-issued trading does not always exist for a stock-splitting firm's shares even though the shares are eligible for when-issued trading.

Although stock splits have been the subject of a large number of studies, intriguing questions concerning these events remain unanswered. In particular, academia has yet to explain adequately the positive average abnormal returns associated with stock split announcements.

These two peculiar phenomena are examined. A major objective of this dissertation is to determine whether there are systematic differences between those stock-splitting firms whose shares are traded on a when-issued basis and those whose shares arc not.

A logistic regression model was constructed, using information with respect to nine accounting variables, to determine if there are systematic differences in accounting information that are useful in classifying stock-splitting firms as being associated with when-issued trading. The classification accuracy of the logistic regression model was significantly better than a random walk model, but was not better than the maximum chance model. The results of the final model indicate that size of the stock-splitting firm is the most significant factor affecting the probability that a stock-splitting firm's shares

are traded on a when-issued basis. The probability that a stock-splitting firm's shares will be traded on a when-issued basis increases with firm size.

The presence/absence of when-issued trading indicates that investors do not react to stock splits in a consistent manner. Therefore, the stock price behavior around the stock split announcements was examined and the difference in the reaction to announcements of when-issued traded and non-when-issued traded firms was tested for statistical significance. The results indicate that the market responds more favorably to the stock split announcements made by non-when-issued traded firms.

The variation in the stock price behavior over a two-day stock split announcement period was analyzed cross-sectionally to determine whether the market reaction displayed through stock prices is related to selected accounting variables. Again, size was the most significant factor. In this case, size was negatively related to the stock price behavior suggesting that stockholders of larger firms earn lower abnormal returns. Another interpretation would be that stock splits are viewed more favorably if authorized by smaller firms.

Overall, the results of this study suggest that all stock-splitting firms are not similar and that the market does not react consistently to the announcement of stock splits of all firms. It seems that the larger the firm, the more likely its shares will be traded on a when-issued basis after the stock split is announced. Furthermore, the market does not react as positively to stock split announcements of larger firms as it does to announcements of smaller firms. My conclusion is that larger firms are more efficiently valued and, accordingly, the announcements of stock splits by larger firms are less informative than for smaller ones.