The Impact of Stock Splits on Stock Prices

Abstract

Stock splits can increase liquidity and also attract smaller investors, although no single study has shown that stock splits have an effect on stock prices. The primary aim of this project was to find the impact of stock splits on stock prices. This paper uses Amazon and Google stock price data for research. The event study and market model were used to analyze the relevant data and to explore the effect. It includes a total of four events on the announcement day and implementation day of the two companies. The study results show that stock splits do have an impact on share prices.

Full text

The Impact of Stock Splits on Stock Prices
Xinyu Ge1,a,*, Lin Li2,b, and Han Leng3,c
1Department of Math, University College London, London, WC1E 6BT, UK
2Department of Economy, Guangzhou Business School, Guangzhou, 511363, China
3Department of Social Sciences, University of Southampton, Southampton, SO17 1BJ, UK
a. zcahxg1@ucl.ac.uk
*corresponding author
Abstract: Stock splits can increase liquidity and also attract smaller investors, although no
single study has shown that stock splits have an effect on stock prices. The primary aim of
this project was to find the impact of stock splits on stock prices. This paper uses Amazon
and Google stock price data for research. The event study and market model were used to
analyze the relevant data and to explore the effect. It includes a total of four events on the
announcement day and implementation day of the two companies. The study results show
that stock splits do have an impact on share prices.
Keywords: effect of stock splits, market modle, event study
1. Introduction
In recent years, with the progress and development of the economy, when a company's share price
increases to a nominal level that may make some investors uncomfortable or is beyond the share
prices of similar companies in the same sector, the company's board may decide on a stock split. A
stock split can make the shares seem more affordable, even though the underlying value of the
company has not changed. It can also increase the stock's liquidity.
When a stock splits, it can also result in a share price increase—even though there may be a
decrease immediately after the stock split. This is because small investors may perceive the stock as
more affordable and buy the stock. This effectively boosts demand for the stock and drives up prices.
Another possible reason for the price increase is that a stock split provides a signal to the market that
the company's share price has been increasing; people may assume this growth will continue in the
future. These further lifts demand and prices [1]. But we don't know if the reality will match the
theory. Although extensive research has been carried out the effect of stock split as a signal, no single
study exists which the event of stock split has effect on price. Thus, this paper will study on whether
stock split have effect to price. Furthermore, in 2022 Google and Amazon both underwent very
special 1:20 stock splits. Therefore, this paper made them as the main subject of the event study.
The present research explores the effects of price due to stock splits. However, due to practical
constraints, this paper cannot provide a comprehensive review of whether the impact was caused by
the stock split alone.
This essay contains four main parts. Firstly, the article gives a brief overview of the literature on
stock splits. The second chapter is concerned with the methodology used for this study, including
Proceedings of the 2023 International Conference on Management Research and Economic Development
DOI: 10.54254/2754-1169/18/20230054
© 2023 The Authors. This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0
(https://creativecommons.org/licenses/by/4.0/).
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market model and event study. Chapter three is the main part of this paper. It focuses on the results
of the analysis of Google and Amazon data. The final section is about the conclusion and limits.
2. Literature Review
Numerous researchers such as Pavabutr, and Sirodom, Chen and Wu, and Yu, and Webb document
that the stock market seems to underreact to stock splits, and frequently report that splits are
associated with positive abnormal stock return [2-4]. Stock split is considered as an informational
event that is accepted by its effect on stock return, marketability, volatility, and ownership structure.
Fama et al. find that firms experience 30% percent excess return for two years before the month of
split announcement [5]. Grinblatt et al. point a major critic on monthly data in study of Fama et al.
[6]. They mention that the effect of other contamination announcements is neglected during the month
that split is announced [6]. Grinblatt et al. by using sample stock that purified of other events report
3.94% excess return for three days around split announcement day, and by the help of these pure
splits conclude the stock splits have valuation effects on the stock price [6] .
Grinblatt et al. also examine Ex-date^2 effects of stock splits on abnormal return, which indicate
one percent abnormal return in Ex-date [6]. Although they try to argue that when-issued shares are
the main reason of this effect in Ex-date, but authors could not find any reason for abnormal return
one day before and two days after the ex-date [6]. They find a valuation effect for a pure split data
with positive return, and conclude the stock splits convey some, but not perfect information, and that
is more like as ambiguous and risky information [6]. Their results indicate an increase in return of all
the pure data on the announcement date and conclude that is not only because of cash dividend
payment, but also because of conveying information by split which managers implement to send a
signal [6].
Desai and Prem examine the market reaction to stock splits for a large sample of 5,596 split
announcements during the period 1976-91 and find 7.11% excess return in the announcement month
[7]. Dennis and Strickland extend the abnormal literature by investigating the relation between
liquidity and abnormal return and find firms with larger enhancements in liquidity have a large
amount of excess return in the announcement day [8].
3. Data and Methodology
3.1. Data
This paper uses daily stock prices of Amazon, Google and NASDAQ Index as data, which is from
‘Yahoo Finance’. The time range of the data is approximately 2 years, starting from June 2020.
NASDAQ was chosen because it is the same market as Google and Amazon. In order to be used in
the event study method, the data was processed and the daily return on the stock was calculated.
3.2. Methodology
This is the market model.
      (1)
where  is the return of the stock (Amazon or Google) at time t, and  is the return of the market
(NASDAQ) at time t.  is the intercept, and  is a coefficient that measures the linear relationship
between individual stock return and market return.  is residual at time t.
This paper first finds a linear relationship between individual stock and the market before the event
(Figure 5 and 6). After the event, the actual return of individual stock is compared with the predicted
return of individual stock based on this linear relationship. If the difference is large, it means that the
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stock and the market no longer meet the previous linear relationship. In other words, events have had
an additional impact on individual stock.
Event Study method was also used, which allows us to analyze the impact of an event on a
company over a certain period of time.
Firstly, four events were defined, which are also four key dates.
On March 9, 2022, Amazon announced that it would execute a 1:20 stock split plan.
On June 3, 2022, Amazon split its stock.
On February 2, 2022, Google announced that it would execute a 1:20 stock split plan.
On July 18, 2022, Google split its stock.
Then this article select the estimation window and the event window in the obtained stock return
data.
For Amazon, a total of 436 trading days from June 1, 2020 to February 18, 2022 was chosen as
the estimation window. And a total of 24 days centered on the split announcement day was chosen as
the event window.
For Google, a total of 412 trading days from June 1, 2020 to January 14, 2022 was chosen as the
estimation window. And a total of 24 days centered on the split announcement day was chosen as the
event window.
Then this paper use the actual individual stock return within the event window (), and predicted
stock return (
) using the coefficients ( 
󰆹) in the estimation window and the market return ()
in the event window. The difference between them is AR.
Since there are four events in total, we do the results four times.
  
      
󰆹    (2)
where  is abnormal return of the stock, and 
 is the predicted return of individual stock. Here 
is the return of the stock within the event window, and  is the return of the market within the
event window.
Then, to measure the impact of event over a given period, cumulative abnormal returns was used.
󰇛󰇜 = 

 … (3)
where  is the length of the event window.
Next, the hypothesis test is carried out in this paper.
Null hypothesis: AR  0,Alternative hypothesis: AR  0
If the estimated value of CAR at some point exceeds the confidence interval, the null hypothesis
should be rejected.
Finally, robustness is checked by changing the length of the event window.
4. Results and Findings
4.1. Study about Amazon
Amazon conducted a 1:20 stock split on June 6, 2022, the fourth stock split since the group went
public. A 1:20 stock split means that each share owned will receive an additional 19 shares after the
stock split. Amazon's stock rose two percent to $124.80 by the end of the day after the June 6 stock
split.
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Figure 1: Amazon's announcement day event window.
Regarding the announcement day as the time window of the event, the results found that the
cumulative abnormal returns are in the 90% confidence interval in Figure 1. So the null hypothesis
cannot be rejected, which declares that the stock split has no effect on Amazon’s return during the
period after they announce a stock split. But there is also an upward trend of CAR after the event date
(day 12).
Figure 2: Amazon's implementation day event window.
Then consider the data in the event window for the day the stock split was implemented. As shown
in Figure 2, the line diagram of CAR exceeded the 90% confidence interval from day 7 to day 10. So
it rejects the null hypothesis that the implementation of the stock split has an effect on Amazon’s
returns after they split the stock. It also shows that the line of CAR exceeds the upper bound, thus it
has a positive effect on Amazon’s return.
The main reason for amazon's stock split is mainly due to the rapid growth of amazon's stock price.
During the period of rapid development of technology stocks, amazon's stock also increased greatly,
which would prevent many investors from entering amazon's stock market. However, Amazon's stock
has been losing money this year, so the group is considering to split its stock so that more investors
can join in. This applies to the idea that the stock split mentioned earlier might spur an increase in
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trading volumes. As a result, amazon chose to split its stock, and our data did show that the stock
price was affected during our selected event window.
In addition, the decline in Amazon's stock price may be due to the Federal Reserve's decision to
raise the benchmark interest rate and the Federal funds rate by 0.75 percent after its June 15 meeting.
After the increase of the benchmark interest rate, the loan cost of individuals or enterprises from the
bank will increase, which will shrink the credit and reduce the social mobility, thus making the price
of Amazon stock fall back.
4.2. Study about Google
Google's stock split was implemented on July 18, 2022, the second time since the company went
public, the first time Google officially implemented a stock split was in 2014, eight years after this
one. Each Google shareholder received 19 additional shares for every one share held at the close of
business on 1 July. Trading resumed on 15 July, and Google’s post-split adjusted stock was well-
received by the market, showing gains of 1.28% and closing at $111.78.
Figure 3: Google's announcement day event window.
Regarding the time window with the date of announcement as the event, the line graph of the CAR
exceeded the 90% confidence interval from day 12 to 14 in Figure 3. Therefore, the null hypothesis
was rejectes that the announcement of the stock split affects the post-split returns of Google stock. It
also shows that the line graph of CAR exceeds the upper limit, indicating that it has a positive impact
on Google's return.
Figure 4: Google's implementation day event window.
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Then observe data with the event window of a few days before and after Google's implementation
of the stock split. As shown in Figure 4, the null hypothesis that the implementation of the stock split
has no effect on Google's returns after they split the stock is rejected by the line diagram of CAR,
which shows a deviation from the 90% confidence interval from days 15 to 18. Additionally, it
demonstrates that the CAR line exceeds the lower bound, which has a negative impact on Google's
return.
Along with the stock split announcement, Google released its Q4 earnings report, which beat
forecasts across the board. Google's overall revenue, EPS, and cloud business revenue, which act as
an engine for future growth, were all greater than expected for the quarter. Its stock price has
outperformed the broader market with an annual total return of 44%, which is much higher than the
S&P 500's 17% and above many of its competitors. This demonstrates that the management is
optimistic about the stock price increase's future and believes that by lowering the entry barrier, more
investors will be able to participate in it. Despite the positive earnings news, The Motley Fool, a stock
analysis and investment website in the United States, issued a warning that Google shares cannot
increase further because supply concerns will adversely damage its advertising business[9].
Alphabet's third-quarter revenue and profit fell short of market expectations, according to FactSet
research [10]. Revenue growth has been growing slowly year over year, net profit has drastically
decreased, and the company's core advertising business has seen a setback. Google's anxiety is
growing as a result of this string of negative headlines.
Unlike this year's poor performance, shares of Apple (AAPL.US) and Tesla (TSLA.US) hit new
all-time highs in the months following the stock split in 2020. Kim Forrest, founder, and chief
investment officer of Bokeh Capital Partners, said investors in Google's parent company should not
expect such price action will be repeated [11]. The stock split did little to boost the stock price due to
widespread concerns about Fed rate hikes and cooling economic growth [11].
Figure 5: Robustness Check on the Event Window of Amazon's Announcement Day.
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Figure 6: Robustness Check on the Event Window of Amazon's Implementation Day.
Figure 7: Robustness check on the event window of google's announcement day.
Figure 8: Robustness check on the event window of google's implementation day.
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Also, after the Event Window for four events was shortened, the results are still robust (As you
can see in Figure 5, 6, 7, 8). The four figures correspond to Figure 1, 2, 3, and 4 respectively.
Although the changing trends of Figure 6 and 8 are not exactly the same as those of the corresponding
Figure 2 and 4, this can still reject the null hypothesis. Therefore, the conclusion remains unchanged.
5. Conclusion
In general, the stock split did have an impact on both companies in the short term, but this paper
cannot be sure whether it had a positive or negative impact, as it had a positive impact on Amazon
and a negative impact on Google.
Fan said that so far this year, the Russia-Ukraine conflict, supply chain disruptions due to the
epidemic blockade, higher-than-expected inflation levels, and slowing economic growth factors have
had an unprecedented impact on the technology industry [12]. The slow growth of the entire industry
is reflected in the Nasdaq Composite Index, which has fallen by more than 23%. Severe supply chain
bottlenecks are a major cause of inflation spiking to historic peaks during the epidemic. Apple and
Tesla in their recent earnings reports have both warned of supply chain risks [13]. These may indicate
that the storied tech bubble is about to burst.
Looking back over the last five years, Google's P/E ratios are at low levels in terms of value
concerns. The long-term outlook for Google is very positive, with upside potential in the advertising
business through product/AI-driven upgrades and relatively rapid development in the YouTube
monetization and cloud computing businesses. This is true even though tech stocks are still under
selling pressure in the near term.
However, if the period of the time window was extended, the results find that the stock of Amazon
has slipped about 20%, this is because inflation has had a significant impact on equities. The
purchasing power of money declines in an economy with significant inflation, which has the effect
of reducing people's wealth [14]. And interest rates are rising inflation. The rising inflation cause a
higher costs on Amazon. Therefore consumers may buy fewer non-essential items on Amazon. These
factor all couse the decreased trend of Amazon price.
But in the long run, stock splits are really important and have an impact on the company. As
mentioned above, Amazon's stock price did drop, which helped attract more investors. It would be
much easier to buy a split Amazon. That factor could help Amazon's stock eventually accelerate.
In general, through the analysis of the data, the stock split does have an impact on the stock price,
but for a very large volume company, it is impossible for the stock split to affect its stock price
volatility. A stock split may have a very significant impact on the stock price in the short term, say a
week or so, but then in the long term, it can also have an impact on the stock price and the company
itself in different ways, such as liquidity. In addition, our current data analysis only focuses on the
single event of stock price and stock split. This article did not discuss the influence of other factors
on stock split. For example whether they also affect stock risk also needs to be further discussed from
the perspective of individual stocks and a group of stocks as portfolios.
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