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Korean Journal of Financial Studies 2013;42(4):639-665.
Published online September 30, 2013.
The Market Reactions to Reverse Stock Splits
Gyun Hwa Jung
주식병합에 대한 시장의 반응
This paper aims to investigate the market reactions to reverse stock splits both in terms of price and volume. Since reverse splits are rare phenomena compared with the stock splits, few studies have been carried out regarding reverse splits, either domestically or internationally. In Korea, there are only two articles about compulsory reverse splits following the changes in commercial law in the late 1980s. In order to look into the market reactions to reverse stock splits, we examine 44 reverse splits completed since 2000. The main findings are as follows: First, unlike the reverse splits done in the US, no negative market reactions appear either on the day of announcement or the effective date. However, a significant negative response appears immediately after the effective date which lasts at least one month thereafter. One month CAR reaches minus 14%, which is more prominent in the Kosdaq market than in the KOSPI market. This result supports the negative signalling effect proposed by Redcliff and Gillespie (1979) and is consistent with most previous findings done in the US. Second, the CAR after the effective date is positively related with the profitability of the reverse split firms, which means the market responds less negatively to the more profitable firms. Third, the profitability of reverse split firms is relatively poor and it worsens after the splits, which is another evidence supporting the negative signalling effect. Fourth, after the split, there is no significant changes in the trading volume while the variability of stock price marginally increases. Therefore one of the two main stated goals of a reverse split, i.e. maintaining price stability by lessening excessive trading volume, does not seem to be achieved.
Key Words: 부정적 신호효과,유동성 효과,주식병합,주식분할,지연반응,Delayed Response,Liquidity Effect,Negative Signalling Effect,Reverse Stock Split,Stock Split

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