Stock Split, is it a positive sign?
Many investors believe that the prices of stocks that split will increase in value because they are priced lower, which increases the demand for them. In contrast, advocates of splits do not expect a change in value because the firm has simply issued additional stocks and nothing fundamentally affecting the value of the firm has occurred. One might asked, is stock split a good thing?
There was actually a study done in 1969 by Fama, Fisher, Jensen and Roll (FFJR). The study hypothesized no significant price change following a stock split, because any relevant information (such as earnings growth) that caused the split would have already been discounted. The result of the study is interesting. Stocks that split but did not increase their dividend experienced abnormal price declines following the split and within 12 months lost all their accumulated gains. In contrast, stocks that split and increased their dividend experienced no abnormal return after the split.
The result of this study indicates that investors cannot gain from the information on a stock split after the public announcement. These results were confirmed by most (but not all) subsequent studies. In summary, most studies found no short-run or long-run positive impact on security returns because of a stock split, although the results are not unanimous. The bottom line; just because a firm announces a stock split, it doesn’t necessary mean their stock will continue to rise as the shares become diluted. Futhermore, today's market is very efficient so any new information such as stock split or dividend announcements and etc. are most likely already reflected in the price. Now, if you had insider information that the firm is about to announce a split or repurchase program, that would be different.
