Is Stock Split a Manipulation Tool? Evidence from the Korean Stock Market*

This paper studies the economic motivations for stock splits in the Korean stock market. Specifically, we investigate whether a stock split can be used not only as a tool to reveal information, but also as a manipulation tool, by dividing sample firms into two groups between the firms that split stocks with and without subsequent corporate events. We then examine each groups changes in short- and long-term abnormal returns and ownership around the time of the stock splits. We find that firms that split stocks both with and without subsequent corporate events show positive abnormal returns around the announcement date. However, we find evidence that long-term performance and insider ownership decline greatly after the announcement date only among the firms that split stocks and have subsequent corporate events. In particular, firms that are listed on the KOSDAQ and go through other corporate events after a stock split exhibit a strong and positive association between change in the insider ownership and long-term performance. This result implies that the decrease in insider ownership and its negative effect on long-term performance are more pronounced in firms that are listed for short periods and are more likely to experience information asymmetry. Overall, our results indicate that firms involved in other corporate events after a stock split are likely to utilize the stock split as a manipulation tool.