The Information Content of Reverse Stock Splits

This chapter investigates whether abnormal reverse split announcement returns are related to information about earnings. I find that abnormal announcement returns are negative on average and significantly correlated with unexpected earnings in the years prior to, and subsequent to the reverse split event. I also find that analyst earnings forecasts are revised downwards after reverse split announcements and that these forecast revisions are correlated with abnormal announcement returns. Finally, I document a significant decrease in earnings response coefficients (ERC) after the reverse split announcements. These results suggest that reverse splits provide information about the permanence of past and future earnings performance.