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The impact of regulation FD on the information environment: evidence from the stock market response to stock split announcements

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Abstract

This paper examines the information environment effects of regulation fair disclosure (Reg FD). We investigate the stock market response to stock splits in the pre- and post-regulation periods. We find that abnormal returns around split announcement are positive in both periods, but the magnitude of the returns is smaller in the post-FD period relative to the pre-FD period. The difference between the pre- and post-FD period abnormal returns persists even after we control for factors that may affect split announcement returns. We also find that the magnitude of the association between announcement returns and the unexpected portion of the split factor has increased post-regulation. Our analysis of performance trends for split firms reveals that patterns of profitability and changes in profitability in the years around stock splits are similar in the pre- and post-FD periods. However, we find that announcement returns are associated with lagged profitability changes in the pre-FD period, but with future profitability changes in the post-FD period. Collectively, our results imply that Reg FD has reduced information asymmetry and improved price efficiency.

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Notes

  1. In an earnings announcement context, Freeman (1987) argues that superior pre-announcement information implies that the market better anticipates earnings news and moves the stock price closer to its full information level before the announcement. Thus, the information gap between pre-and post-announcement is expected to be smaller when the overall market has superior information about the upcoming earnings announcements beforehand.

  2. Grinblatt et al. (1984) adopt a classification scheme that identifies all stock distribution with more or equal to 25 % as stock splits following the GAAP treatment. Other studies also use similar criteria. See Brennan and Copeland (1988), McNichols and Dravid (1990), Brennan and Hughes (1991) for additional information. For stock distribution of 25 % or more, the accounting standards leave firms free to choose to classify the distribution as stock splits or stock dividends. CRSP classifies almost all stock distribution of 25 % or greater as stock splits.

  3. Using 2-day CAR or 5-day CAR instead does not qualitatively alter the results.

  4. CRSP Equally weighted market index is also tested for the robustness check. The change in market index does not alter the conclusion.

  5. For example, Fama et al. (1969) find that about two-thirds of the split announcements accompany a dividend increase. Asquith et al. (1989) report the evidence that dividend initiation and increases are not informational substitutes in the context of stock split. Grinblatt et al. (1984) also document that split announcement effect is higher for non-dividend paying firms. Desai and Jain (1997), using partitioned sample based on whether firms announce dividend increases along with stock split announcement or not, finds larger abnormal returns for the dividend increase sample. Nayak and Prabhala (2001) find that dividend paying firms’ splits are likely to accompany increase in dividends.

  6. Using ROE instead of ROA as a performance measure provides similar results.

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Acknowledgments

We thank Professor Cheng-Few Lee (the Editor), two RQFA reviewers, Professor Bharat Sarath, Hua Xin and participants of the 20th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management for their comments.

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Authors and Affiliations

  1. Department of Business and Information Technology, Missouri University of Science and Technology, Fulton Hall, 301 W 14th Street, Rolla, MO, 65409, USA

    Li Li Eng

  2. Department of Accounting, Joseph A. Butt, S.J. College of Business, Loyola University New Orleans, 6363 St. Charles Ave, Campus Box 15, New Orleans, LA, 70118, USA

    Joohyung Ha

  3. School of Accounting, Spears School of Business, Oklahoma State University, 418 Business Building, Stillwater, OK, 74078, USA

    Sandeep Nabar

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  1. Li Li Eng
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Correspondence to Li Li Eng.

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Eng, L.L., Ha, J. & Nabar, S. The impact of regulation FD on the information environment: evidence from the stock market response to stock split announcements. Rev Quant Finan Acc 43, 829–853 (2014). https://doi.org/10.1007/s11156-013-0394-4

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