Linkage between stock split and corporate financial performance: some evidence from india

Stock split is considered by the management of a company as one of the most powerful and cost effective tool of providing signals of exceptional performance of a business and its bright future prospect. The main motive of this study is to examine the financial performance and value creation made by the Large Cap, Mid Cap and Small Cap stock splitting companies of India before and after the stock split to verify the above signalling concept of stock split. At first, financial performance of the sample companies for the pre and post stock split is measured by using five measures those are Return on Capital Employed (ROCE), Return on Net Worth (RONW), Earning Per Rupee Value of Share (EPRVS), Dividend Per Rupee Value of Share (DPRVS), and Market Value to Book Value Ratio (MV/BV Ratio) and after that the value addition made by them is measured by using two modern measures that are Market Value Added to Net Worth (MVANW)and Shareholders Value Added to Net Worth (SVANW). It is found that the immediate and sustainable change in the performance of Large cap and mid cap group stock splitting companies have not been better than their control companies. There was significant negative change in the performance of large cap and mid cap stock splitting companies after the stock split. Thus they have not satisfied the signalling concept of stock split. On the other hand stock splitting companies of small cap group performed better than the other two groups after the stock split as all the five measures of financial performance have been changed positively and out of them EPRVS and DPRVS have been improved significantly in case of stock splitting companies of small cap group. The small cap stock splitting companies have also performed better than their control companies after the stock split. Thus the concept of signalling good performance and bright future prospect has been applicable to only small cap stock splitting companies to much extent. But at the same time, based on MVANW and SVANW, they also revealed significant deterioration of their value to the shareholders in the sustainable time frame.