What causes abnormal returns following stock splits? : the impact of institutional and retail ownership over time

Abstract

In this study we investigate to what degree the composition of ownership, retail and institutional, has an effect on the already established abnormal returns following stock splits. We look at time periods of 1 month, 3 months, 1 year and 2 years. We hypothesize that an increase in retail ownership following a split is positive in the short-run, but negative in the long-run, in terms of returns. Conversely, we then argue that an increase in institutional ownership yields positive abnormal returns in the long-run, and negative in the short-run. This study is largely inspired by the work and contradictory findings of Cui, Li, Pang & Xie (2020), Chemmanur, Hu & Huang (2015) and Chen, Nguyen & Singal (2011). We find that on average for our dataset, an increase in institutional ownership yields a negative abnormal return of 2.75% compared to a counterpart with increased retail ownership, when viewing a 3-month period. Subsequently, we find that for a 2-year period, companies with increased institutional ownership outperform those without by 7.5% in terms of abnormal returns. These findings are consistent with our hypotheses. However, when statistically testing our calculations, we determine a significant negative relationship between increase in institutional ownership and returns for 3-month, 1-year and 2-year periods. This leads us to reject our hypothesis that an increase in institutional ownership is positively related to abnormal returns in the long-run. Overall, our work lends support to the behavioral signaling effect proposed by Cui et al. (2020.