Market Reaction to Stock Splits in Large and Liquid Stocks: Evidence From the Indian Stock Market

Abstract

This study investigates market reaction to stock splits using the standard event study methodology. The study uses stock splits in large and liquid stocks in the Indian markets during the years 2001 to 2012. According to a semi-strong form of efficient market hypothesis, any information content associated with corporate announcements must be reflected fully on announcement day itself resulting in an abnormal return. However, several studies report abnormal returns surrounding announcement as well as effective day of stock split, and many competing hypotheses are presented to explain such abnormal returns. Studies from India on market reaction to stock splits offer mixed results. (Gupta & Gupta, 2007) find significant abnormal returns surrounding ex-split day and not surrounding announcement day. (Joshipura, 2009) and (Ray, 2011) find abnormal returns surrounding announcement day. This study reports reaction to stock split in large and liquid stocks that are constituents of NIFTY or NIFTY Junior.