Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?

Abstract

We examine the long‐run return performance of over 1,600 firms with reverse stock splits. These stocks record statistically significant negative abnormal returns over the three‐year period following the month of the reverse split. The sample firms experience poor operating performances over the four years that include and follow the year of the reverse split, which suggests informational inefficiencies. Because these stocks have unique financial characteristics, we also show that they would be very difficult to sell short. Thus, arbitrageurs would be restricted in their ability to earn abnormal profits, even if they correctly anticipated a price decline.