| Abstract: | An emerging literature looking at self-selected, corporate newsevents concludes that markets appear to underreact to news.Recent theoretical articles have explored why or how underreactionmight occur. However, the notion of underreaction is contentious.We revisit this issue by focusing on one of the most simpleof corporate transactions, the stock split. Prior studies thatreport abnormal return drifts subsequent to splits do not appearto be spurious, nor a consequence of misspecified benchmarks.Using recent cases, we report a drift of 9% in the year followinga split announcement. We consider fundamental operating performanceas a source of the underreaction and find that splitting firmshave an unusually low propensity to experience a contractionin future earnings. Further, analysts' earnings forecasts arecomparatively low at the time of the split announcement andrevise sluggishly over time. Together these results are consistentwith the notion of market underreaction to the information incorporate news events. |
