A study of firms which split their stock at least 3 times in the past 20...
A study of firms which split their stock at least 3 times in the past 20 years shows that there were, on average, positive (and statistically significant) abnormal returns both before and after a split. Do the positive post-split returns indicate a market inefficiency? Explain.
Homework Answers
The definition of market efficiency is the prices of assets reflecting all the available information an hence in such cases the market reflects the correct prices without any scope for making gains for investors or traders. Given that there is an average positive and statistically significant abnormal returns both before and after a split, the result points to information asymmetry between the firm and the market participants as the only explanation for an abnormal return is the market inefficiency. In the case of perfectly efficient market, the abnormal returns are close to zero or zero. However, for firms to show positive abnormal returns that are significant too points to market inefficiency.
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A study of firms which split their stock at least 3 times in the
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