MANAGERIAL MOTIVES FOR SPLITTING STOCKS: EVIDENCE FROM ELECTRIC UTILITY COMPANIES

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Mercedes Miranda

https://doi.org/10.22495/cocv6i1c4p7

Abstract

Despite the rich literature on stock splits, studies have omitted public utility firms from their analysis when examining managerial motives for splitting stocks. In 1992 Congress enacted the Energy Policy Act (EPACT) to encourage the development of a competitive, national, wholesale electricity market. I argue that the change in the regulatory environment for public utilities provides a clean setting to study and compare the signaling and liquidity motivations for splitting stock. Before deregulation, the signaling motivation for splitting stocks is not applicable for these firms because the level of information asymmetry is low. Hence, the liquidity hypothesis should be the primary motivation for electric utilities to split stocks during this period. After deregulation, however, the signaling effect is expected to play a more dominant role because of higher level of information asymmetry. The results are consistent with the hypothesis posed. For the pre-EPACT period, liquidity motive seems to predominate in explaining the abnormal announcement return of utility stock splits. On the other hand, the results support the signaling motive as a leading explanation of abnormal returns in the post-EPACT period.

Keywords: Stocks, Electric Utility Companies, Managerial Motives

How to cite this paper: Miranda, M. (2008). Managerial motives for splitting stocks: Evidence from electric utility companies. Corporate Ownership & Control, 6(1-4), 475-484. https://doi.org/10.22495/cocv6i1c4p7