The Return Volatility Effect of Stock Splits : An Empirical Study Questioning Whether or Not a Stock Split is Merely a cosmetic Accounting Change

Abstract: There are many possible explanations as to why management of a firm would declare a stock split. Many studies thus focus upon examining those explanations. There are also many studies that focus on what the effect of a stock split is. According to textbook theory a stock split should be of economic irrelevance for firm value. This because only outstanding shares increase and the value of the share decrease when a stock split is conducted, thus shareholder value should be constant.Investors are of course concerned with shareholder value, but often they are also interested in receiving the highest return whilst taking on the least possible risk. With previous research suggesting that stock splits actually may have real effects on shareholder value and return volatility we wanted to investigate this relationship further. This lead to the following research question: “Does a stock split affect stock return volatility of stocks listed on NASDAQ OMX Stockholm?”The main research purpose of this study is to answer the above research question as well as examining if there are differences in effects depending upon the firms’ market capitalization. This is a quantitative study with a deductive approach and a cross-sectional and longitudinal research design covering historical data from 2002 through 2012. The study uses two different measures of return volatility, standard deviation and beta. The paired samples t-test, Wilcoxon Signed Ranks Test and binomial Z test are conducted in SPSS in order to empirically answer the research question.The results indicate that there actually is a significant increase in return volatility, measured as both standard deviation and beta, in the post-split period. However, the findings also indicate that this increase is mainly attributable to the days closest after the stock split. When examining small and mid cap separately we found no significant difference in return volatility between the pre-split and post-split data. The stock splits conducted by firms in large cap on the other hand proved significant test results of an increase in the post-split period. The research question is concluded upon with yes, the findings indicate that a stock split is likely to increase the firm’s stock return volatility. Furthermore, that this increase is not continuous for a long period after the stock split but rather decreases or stabilizes close to its pre-split levels. The findings could possibly be argued to be explained by the liquidity hypothesis, agency theory, signaling theory, the optimal price/tick hypothesis and the procedure/structure hypothesis.