Stock split size, signaling and earnings management: Evidence from the Spanish market

This study uses a sample of Spanish companies to examine the use of stock split announcements as signals of a firm's earnings performance. Our results confirm that, as in other stock markets, investors in the Spanish market upwardly revise share prices and financial analysts improve their earnings forecasts after stock split announcements. We also find that firms that announce a stock split show significantly better operating profitability in the years prior to the split than matching companies of the same size and industry; and that these relatively better profits are not the result of earnings management practices. Finally, our results suggest that only when the split factor is greater than expected will investors interpret splits as a signal of the permanent character of past earnings. (C) 2009 Elsevier Inc. All rights reserved.