..1. Background
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Consistent with (Sharpe, Alexander, Bailey, 1995), stock split is an accounting operation that augments the number of stocks gripped by current stockholders in percentage to the number of shares currently owned by these shareholders. A stock split involves a decline in the nominal value of the company'''s stock and the immediate interchange of a multiple amount of new shares for each current share
Stock splits have long been a fuzzy wonder to market players and academics. Taken at par value, such divisions are just a finer slicing of the total market value of the company, and as such should have no influence on corporations and stockholders (Lakonishok and Lev, 1987).
Since (Fama, Fisher, Jensen and Roll, 1969) issued their pivotal research on stock splits, a huge body of study has examined this specific firm resolution. The importance in stock splits is induced by the actuality that this event is not directly associated to variations in the operational or financial composition of the firm and, therefore, shouldn'''t bring about any change in stock price other than the modification guaranteed by the split element.
Stock splits are questioning company events; Stock splits occur over and over; less often firms link their outstanding common stocks in a reverse stock split. It is widely approved that stock splits are purely pointless events because the corporation'''s cash flows are unaffected; each stockholder holds his relative possession and the rights of other classes of security holders are not changed.
If stock splits were purely nonessential, it would be astonishing to find them connected with real effects. Yet, real effects are connected both with the declaration of the split and with its existence , splits are connected with statistically significant stock price reassessments and uncommon volumes of trade and profit changes around the declaration dates and, even more astonishingly, around the execution dates. These effects have been informed in a number of universal studies. These outcomes indicated that if share prices could be increased by directors through splitting their firm'''s stock, both underestimated and overvalued firms would choose to split their shares, thus removing the informational (appropriate) essence of the resolution. Since the declaration of the classic study by Fama, Fisher, Jensen and Roll (1969), the signaling hypothesis and the trading range hypothesis have appeared in the finance literature as the principal explanations of stock splits. The finance literature contains a rather limited number of studies related to stockholder wealth affected by stock allocations such as stock dividends and stock splits.
split, may be used by investors for consideration in the planning portfolio and prospective investor can use this information for studying his resolution whether to buy or not to buy shares to accomplish the ideal profit taking into the consideration the risk. Besides stock split information to attract investor and give a return for investors, the dividend paid should be bigger (Ahmad, 2004).
Dividend pay from investment in stock is a possibility for investor. Besides dividend, investor expects acquire profit from its investment. Acquired a profit shareholder received from stock price increases. Great positive profit indicates that stockholder obtains abnormal return. Abnormal return usually obtained because of quick reaction data by stockholder, making share price growing. Consistent with Samson (2008) that abnormal return is change between actual yield and the expected yield that can take place before information distributed, or there has been penetration of information before official information announced. Bodie, et al (2006) report that abnormal return as the yield above what would be foretold from market movement alone. Stock split data is one of company action endeavors to enhance company value. Stock split provides information to investor about outlook of essential future return.
The stock split publication contemplated as a signal given by administration to the public that a company has good vision in the future Marwata, 2001) researched results showed by Miliasih (2000) Sutrisno (2000), Fatima (2010), Sadikin (2011), and Astuti (2012) did not support this theory. These researchers did not find any abnormal return related tostock split declaration. But the other researches outcomes managed by Sudiro (2000), Kurniawati (2003), Rusliati and Farida (2010), and Sadikin (2011) showed that round stock split declaration there was abnormal stock price performance owed to the market competitors''' reaction on the Stock Exchange.
Extra data can be gained after stock split is info about stock trading activity. Info held by investor will be converted in the form of rise and fall daily deals in volume and hesitation of transactions. Volatility happens because there is private data that detected through the transaction technique.
(Wibowo, 2004) conducted that the Stockholder also can make remark about trading volume data connected with stock prices. Stock with high trading volume will cause a high stock return (Chordia, 2000). To some extent more stocks trafficked can be seen from the big trading volume activity, (TVA) by way of clarification, Trading volume is the ratio between total shares traded at any given time with total shares outstanding at any given time, The Stock split strategy creates a lower stock price and total shares consequently supposed to react affirmatively with buying shares that can be seen from TVA augmented, (Jogiyanto, 2008), Stock liquidity is one of pointer to see market react to an declaration of stock split, Stock liquidity can be seen from trading volume that happens on a stock.
(Husnan, 2005)conducted that the major objective of stock split is liquidity, its mean smoothness to trade and more recurrently traded stocks on the exchange. Illiquid stock often produced by two things namely, the stock price is too high and total shares trafficked too little. Therefore, the stock split strategy to make total shares trading and the share price more reasonably. So expect probable investors interested in investing (Muharram 2009). Trading range theory ( Marwata , 2001) stated that stock split will rise stock trading liquidity. As said by this theory, stock prices are too high drive to less dynamic stocks traded. But in some cases stock split does not reinforce this theory, such as the study of Kurniawati (2003), Fatima (2010), Sadikin (2011), and Astuti (2012) which conducted that there was no important modification to stock trading volume and stock returns before and after stock split. While another studies result were supporting the trading range theory conducted by Sutrisno (2000), Rohana et al (2003), Pavabutr (2008). Then Rusliati and Farida (2010), those researchers obtained result that significantly influence to stock trading volume and stock return.
According to those results, there are discrepancies in the study result, resulting in different deductions.
Therefore, the researcher is interested in studying the stock split policy as huge numbers the companies adopted that policy in the Egyptian stock exchange and if this policy have a significant effect on achieving abnormal return (prices return) Trading volume, and volatility in prices
Literature review
Stock split actions have been examined by theoretical researchers from different nations. Some focused on the motives why firms declare stock splits. Some examined the stock price performance around stock split declaration dates in different stocks markets. Others investigated the indication sent to the market from the stock split declarations and another point of views and philosophies tried to explain the effects of stock split
One of the first studies that examined the effect of the post-split declarations on stock prices was conducted by Fama, Jensen, Fisher and Roll in 1969. In their paper, they studied the process of stock price modifications to stock split declarations on the New York Stock Exchange (NYSE) between the years 1927 to 1959. By way of explanation, they examined to what extent the New York Stock Exchange (NYSE) was effective in getting data about stock splits. They identified two standards for a split declaration to be encompassed in their sample. The first was that the split ratio must be 25 per cent or greater, and the other is that the company declaring the split must be recorded on the NYSE for no less than twelve months previous and post the declaration. However, 940 splits met their principles. They separated the sample to stock split related with dividend escalation and stock split accompanying with dividend reductions. Fama et al, discovered that in the period prior to stock split the cumulative average abnormal return (CAAR) augmented gradually up to the split ex-date, and then CAAR reduced after the split ex-date. Stock split info was fully mirrored in the stock price at least by the end of the split month. Therefore, they concluded that the market was efficient in the period between the years 1927 to 1959 with respect to stock split declarations.
A modern research done by Boehme & Danielsen inspected the affiliation between stock split and post-split long-run abnormal returns (2007). Their study was achieved on a long period sample (from 1950 to 2000), and they witnessed that abnormal returns associated with stock split happened in a short period. Also the abnormal returns did not last after the actual split occurred. Additionally, they considered the industry drove effect in submitting their deductions. They concluded that the post-split trend occurred in a short period after the split declarations, and proposed that the trend is caused by market rubbing in place of behavioral preconception.
Stock splits are accompanying with affirmative abnormal returns either in the short run (round the publication dates and ex-dates) or in the long term. For example, Maloney and Mulherin (1992) introduced proof of capital escalation effect around the declaration and execution dates, for their sample of NASDAQ stock splits that happened between the beginning of 1985 and the end of 1989. Round the declaration date, they found a significant price run-up in the ten days leading to this date. These authors also found price rises around the execution date, though of smaller amount than those recorded for the publication date. The price escalation is also substantial for the three days beginning on the implementation date. Maloney and Mulherin argued that this affirmative response on the ex-date cannot be connected to informational purport, since the split date is recognized well beforehand. Other authors studied the long-term inferences of stock splits for abnormal stock returns.
This is the case of Ikenberry et al. (1996), who looked at both short-term and long-term extra returns (one and three years). For the calculation of declaration abnormal returns they reflected a five-day market adjusted profit (from day '''2 to day 2). For the whole period they found an abnormal return of 3.38%. The outcomes showed an abnormal return of 7.93% for the first year subsequent the declaration month. For the next two years the returns were not statistically substantial, totaling ''' 0.44% and 1.32% for year two and three, harmoniously. The authors believed that these outcomes are consistent with the hypothesis that appropriate info connected to the split was totally entrenched into prices inside one year after the declaration.
Desai and Jain (1997) also focused their awareness on long run acting for splitting companies. In their study they also examined the long-term performance accompanying with reverse splits. They concluded that the stock splits abnormal return for the declaration month was 7.11%. For the sample of reverse splits. The outcome gained was '''4.59%. supported the results by Ikenberry et al. (1996), the abnormal returns documented by the writers for year one after the declaration month accomplished 7.05%, with insignificant abnormal returns of 1.02% and 0.72% in years two and three one-to-one. For the sample of reverse splits, they documented an abnormal return of '''10.75% for year one but insignificant returns for years two and three.
Boehme (2001) as well offered outcomes on the long-duration acting subsequent the declaration of stock splits. Boehme gathered data from a very long time framework, containing 51 years, from 1950 to 2000. The essential variance among this research and the two previous ones was fundamentally the investment of various approaches for accounting long-period abnormal returns. The author used calendar time methodology based on a four-factor model. Boehme terminated that the prior clarifications could not fully explicated the returns for the duration 1975-1987, when value weighting was used. He suggested two clarifications:
1) A market microstructure scrimmage proving that the average dealers were not given the opportunity to receive the abnormal profit.
2) The impact of chance, finally post declaration unpredictable variations in systematic risk. The writer concluded that there was no continual or unintelligible long run abnormality related to stock splits. The writer'''s proof of abnormal affirmative performing subsequent the declaration date until the implementation date was not reported in his study.
Some writers supposed that stock splits and stock dividends are fundamentally the same thing (dispersion of stock without real exchange of cash), and add (large) stock dividends to their stock split samples.
Desai and Jain (1997) duplicated their experimentation, separating the sample into two sub-samples, one enclosing all the '''pure''' stock splits and the other containing the stock dividends. They witnessed that the outcomes gained are essentially unchanged. Two further studies, however, report diverse results.
Lakonishok and Lev (1987) in their search for the causes why corporations split their shares, studied separately stock splits and stock dividends. They collected data on stock allocation for the period 1963-1982. They certified that the incomes and dividend growth rates were higher for stock splitting than for stock dividend organizations, when compared with control corporations. Before the declaration, splitting companies also had a strongly higher price (almost 70%) than control firms. They found the contradiction for stock dividends companies.
A point where there is congruence concerning stock splits is that these procedures are preceded by a period of abnormal returns before the declaration. Lakonishok and Lev (1987), Maloney and Mulherin (1992), Ikenberry et al. (1996) and Boehme (2001) all reported a significant pre-split price run-up for splitting companies.
Mittal (2015) conducted that''' The Efficient Market Hypothesis is based on concept of immediate assimilation of all types of info in the stock prices resulting into only normal profits to the stockholders. The Efficient Market Hypothesis reports that nobody can consistently earn superior returns since the publicly available information is incorporated in the security prices instantaneously. Any delay in this process can cause anomalous behavior of the stock price behavior leading to abnormal returns to the investors. The study found that market reacts positively to this signal and perceives the stock split as good news resulting in the increase in share prices immediately after the announcement. The results show that the Indian Capital Market is semi strong efficient as it is using the information relevant for security valuation and for investment decision making. The role of SEBI can be instrumental in preventing insider trading so that the confidence of the investors is maintained and the stock market can become more vibrant and dynamic'''.
Kalay and Kronlund (2014) conducted that''' Ever since Fama, Fisher, Jensen, and Roll'''s seminal paper [1969], financial economists have sought to comprehend why markets respond to stocks split declarations, since a stock split appeared to be just a nonessential bargain that increases the number of shares outstanding and reduces the share price by the split factor. Taken together, their proof shows that the abnormal returns around split announcements are consistent with an earnings information-based explanation. We find that analysts increase their earnings estimates around stock split announcements, and that the revision is greater for firms with more opaque information environments. Furthermore, the earnings forecast revisions for splitting firms is significantly higher than that for matched firms, indicating that the observed increase in earnings estimates does not result from analysts sluggishly revising their forecasts in response to the splitting firms''' past performance. The results also show that the cross-sectional variation in the analyst forecast revisions is positively correlated with the cross-sectional variation in announcement returns. Finally, we find that the future earnings growth of the splitting firms is higher than that of matched firms with similar past earnings growth, for up to two years following the split. While both the splitting firms and the matched firms experience lower earnings growth in future periods after the split compared to their own past earnings growth, the future earnings growth of the splitting firms is nevertheless higher than that of the matched firms. This result implies that the earnings growth experienced by the splitting firms before the split is less transitory in nature than the pre-split expectations (as proxied by the performance of ex-ante comparable firms). This result helps explain why analysts revise their expectations of future earnings following a split announcement and increase their earnings estimates. This positive change in expectations is likely to be a primary reason why the market views a stock split announcement as favorable news. Our evidence supports the hypothesis that while managers often state various motivations for splitting their stock, the market'''s reaction to stock split announcements is likely driven by information related to the firm'''s earnings, which the market infers from the split announcement and views as favorable news. An earnings information hypothesis therefore warrants renewed attention as an explanation for the market'''s reaction to stock split announcements'''
'''Subaih )2013 investigated the effect of stock split declarations on stock prices in the Toronto Stock Exchange (TSX). Unlike other papers, the short-term effect was only considered in his study. The results built on his paper, were that the abnormal returns are only existed in a very short period surrounding stock split actions. On the other hand, there was no proof suggested that the abnormal return will keep to exist in the long-run. However, the outcomes of his paper are pretty much in agreement with what Fama et al (1969) found. That is the abnormal returns will die out through the time.
2.2 Merger and Acquisition (M&A)
Subaih, (2013) conducted that For Merger and Acquisition objective a firm might announce a stock split. A modern study was done by Guo, Liu and Song questioned why administration tends to split their stocks before a Merger and Acquisition (M&A) declaration particularly when the acquisition is financed with stocks (2006). Their sample consisted of 4,782 acquisition declarations from 1980 to 2003, which happened in NYSE, AMEX and NASDAQ. However 8.66% of their sample was correlating with stock split declarations in the period of six months before the acquisition was declared. They confirmed that a general clarification about why administration announced stock splits before (M&A) declaration is based on either signaling theory or optimal trading price range hypothesis. They found that administration announced stock splits before (M&A) declaration to inflate their equity value (Guo, Liu and Song, 2006). They concluded it is much more likely for obtaining firms to split their stocks than for firms that do not dispose to obtain other organizations.
3. Problem statement
Consistent with (Lindahl and Wachowicz, 2001), Stock splits are company incident self-taken by administrators as to if and when they occur. Amongst all the potential actions one might emphasis on, the stock split is attractive because it is one of the few company resolutions that does not directly have an effect on coming cash flows or company risk features.
Argument remains as to why directors select to split their stock, most papers theorize that administrators are transferring affirmative indications to the marketplace. One line of logic is that administrators are purposefully trying to transfer information through the operations (Brennan and Copeland, 1988). Nonetheless another writings have recommended that these signals may be unintended and in state splits happen as a result of administration'''s willingness to solve some other issues. Definitely, administrators may split their stock in order to maintain a trading range (Dravid, Grinblatt, Masulis, Nicholas and Titman, 1990).
Prior papers which had fundamentally concentrated on developed capital markets for example Ikenberry, Rankine and Stice,1996 and Desai and Jain, 1997, had created proof of affirmative long-horizon drifts subsequent split declarations. Though a research carried out by (Isil Sevilay Yilmaz, 2003) on the impact of stock split declaration on Istanbul Stock Exchange – an emerging market – created incompatible findings suggesting that split declarations might create negative outcomes in the splitting corporation'''s returns and liquidity.
Few studies had been carried out on the Egyptian stock exchange connected with the effects of adopting for stock split policy .
3.1The questions of this project are as follows:
– What is the impact of adoption of listed companies in the Stock Exchange of Stock Split policy on the Stock capital gain(price return)?
– What is the impact of adoption of listed companies in the Stock Exchange of Stock Split policy on Stock Prices Volatility?
– What is the impact of adoption of listed companies in the Stock Exchange of Stock Split policy on Trading Volume?
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