Irrational investor response to stock splits in an emerging market

Using the creation and collapse of the Cyprus stock market bubble as a backdrop, we document substantial positive abnormal returns around the announcement and execution of stock splits in Cyprus. Split-induced returns cannot be explained by variables proxying for conventional liquidity and signalling hypotheses for stock-split activity. Positive split-induced returns are largely reversed in the post-split months. Post-split stock underperformance is inversely related to, and thus appears to be a correction for, the significant market overreaction at split execution. We suggest an investor irrationality explanation for these results, arguing that stock splits were associated with the creation of the bubble due to the inability of investors to understand splits correctly. We conclude that educating investors in emerging markets to process information correctly will improve the efficiency of such markets.