Why Do Firms Issue Equity after Splitting Stocks?

Posted: 19 Jul 2003

See all articles by Ranjan D'Mello

Ranjan D'Mello

Wayne State University - Department of Finance

Oranee Tawatnuntachai

Pennsylvania State University - School of Business Administration

Devrim Yaman

Western Michigan University

Abstract

This paper examines the motivations of firms that conduct seasoned equity offerings (SEOs) after splitting stocks. We find no difference in equity announcement and issue period returns between these firms and other equity-issuing firms suggesting that firms do not split stocks to reveal information and reduce adverse selection costs at the subsequent SEO. However, because investors react positively to split announcements, firms that issue equity after splitting stocks sell new shares at a higher price and raise more funds. We also find that firms split stocks to make the subsequent SEO more marketable to individual investors who are attracted to low priced stocks.

Suggested Citation

D'Mello, Ranjan and Tawatnuntachal, Oranee and Yaman, Devrim, Why Do Firms Issue Equity after Splitting Stocks?. Available at SSRN: https://ssrn.com/abstract=395900

Ranjan D'Mello (Contact Author)

Wayne State University - Department of Finance ( email )

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Oranee Tawatnuntachal

Pennsylvania State University - School of Business Administration ( email )

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Devrim Yaman

Western Michigan University ( email )

Kalamazoo, MI 49008
United States
269-387-5749 (Phone)

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