The information content of stock splits

We develop a new methodology that controls for both the timing of annual earnings news (Asquith et al., 1989) and the performance prior to split announcements (Barber and Lyon, 1996) to evaluate the information content of stock splits. In contrast to existing evidence, we find that stock splits in aggregate are followed by positive abnormal future earnings growth, suggesting that stock splits contain information about future, rather than past, operating performance. When we use changes in breadth of institutional ownership as a new metric of information content to corroborate our findings, we find that splits with the greatest increase in breadth experience positive post-split abnormal returns and positive abnormal earnings growth. Together, our results suggest that some splits contain positive information about future performance, and that sophisticated market participants such as institutional investors are able to select these splits.