Stock Split Announcements and Their Impact on the Short Run Stock Price Performance: An Analysis of the Pre and Post Pandemic Stock Split Announcements in the Colombo Stock Exchange

Abstract

Introduction: This study was done in order to analyse the short-run impact of stock split announcements in the Colombo Stock Exchange of Sri Lanka through a comparison of announcements made during the Pre-Covid and Post-Covid periods. With the use of secondary data, the event study methodology was used to recognize the abnormal returns that have occurred due to the announcement of a stock split. The main objective of the study was to recognize whether there has been any change in how the market perceives stock split announcements and whether there has been any change in the Pre- and Post-Covid eras. The study has been able to unfold that the negative sentiment that was there towards stock split announcements in the Pre-Covid era has evolved towards a more positive sentiment in the Post-Covid era with the development of capital markets in Sri Lanka.

Methodology: By constructing this study using the event study methodology, I have looked at the time period running up to the announcement and have analysed the post-announcement period as well by looking at the reaction of the split announcements on the average abnormal returns, cumulative average abnormal returns, and the t-statistic of the average abnormal returns. Through these avenues, the change in perception of these stock split announcements can be identified.

Finding: While during the Pre-Covid era there has been a negative sentiment towards stock split announcements with negative Average Abnormal Returns of -0.64%, there has been a drastic change in the Average Abnormal Returns in the Post-Covid period indicating a return of 15%, showing a change in the perception that has evolved with the development of Sri Lankan capital markets. With various new developments in the economy and new innovations, the investor sentiment has also changed into seeing more opportunities with stock splits.

Conclusion: Through the findings of this study, we can conclude that the stock split announcements in the Pre-Covid era, which were perceived to be negative by the market, have changed into a more positive perception during the Post-Covid period in creating more opportunities for market participants in the short run. With continuous analysis, it can be seen that the new developments and changes of the market have facilitated this sentiment, and for future research, a continuation of such trends can be analysed. Therefore, it is important to follow the impact of stock split announcements for short-run performance of stock prices.