Signaling through timing of stock splits

We develop a dynamic structural model of stock splits, in which managers can signal their private information through the timing of the split decisions. Our approach is consistent with the empirical evidence that shows that the majority of stock splits have 2:1 ratio but are announced at various pre-split price levels. The model allows us to estimate the nominal share price preferences of investors and to decompose the split announcement return into the value of new information and the signalling cost. This signalling cost could reach 0.5% of a company’s value for the lowest pre-split prices in our sample.