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Prof. Qin Tan
Assistant Professor of Accounting
Department of Accountancy
City University of Hong Kong

This paper documents a previously unrecognized yet significant cost of stock splits, reflected in lower earnings announcement returns (EAR) in the post-split period. We identify two primary channels underlying this phenomenon: lower earnings surprises (FE) and lower earnings response coefficients (ERC). First, firms that undergo stock splits tend to report lower earnings surprises post-split. Second, the quality of these earnings surprises declines as firms increasingly engage in earnings management to meet or beat earnings targets, resulting in a weaker market response. Collectively, our findings suggest a substantial and long-lasting cost to stock-splitting firms, as managers are unlikely to favor outcomes such as lower EAR, diminished FE, weakened ERC, and a heightened reliance on earnings management on an ongoing quarterly basis. Furthermore, the cost of stock splits has significantly increased over time, which partially explains the observed decline in their frequency.