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There is evidence that create a stock split outperform the market while those that undertake reverse stock splits under-perform. The Stock Split Trading System & Strategy works because company splits its stock it’s often because of strong share price performance.
Usually the company splits the stock to bring the share price down and make it more affordable for investors to purchase blocks of shares. Therefore, the stock split effect is tied in to the momentum anomaly.
There is also evidence from Kalay (2014) that stock splits cause analysts to revise earnings forecasts by around 2.2-2.5% which could be another component of the excess returns.
On the flip-side, reverse stock splits are more associated with negative returns.
In a sample of 143 reverse stock splits in US micro cap stocks between 2008-2016 I found an average return of -5% over the 50 days after the reverse split.
Here, the explanation is that reverse stock splits are typically implemented in poorly performing stocks.
Such companies typically implement the reverse split not as a sign of quality but because they need to trade over a certain price level to maintain exchange listing requirements.
The Stock Split Trading System & Strategy:
You can implement a portfolio that consists of going long stocks after stock splits and going short stocks after reverse stock splits. Short trades must be managed closely but long trades can be held for up to 50 days.
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