An examination of the survivability of reverse stock splits

Abstract

Purpose

The purpose of this paper is to examine the survivability of 810 reverse splits during the 1995-2006 period and show that companies that undertake reverse stock splits often fail within a relatively short time following the split.

Design/methodology/approach

Applying both a logit model and an adapted version of the Hensler et al. (1997) accelerated failure time model to 810 reverse splits during the 1995-2006 period, the authors are the first to study the survivability of reverse split companies.

Findings

The paper finds that the market reaction to the reverse split on the ex-date is an important predictor of the likelihood of survival and of survival time. The paper finds that the likelihood of survival also depends on firm size, pre-split firm returns, and the post-split share price level. The paper finds that post-split survival time also depends on firm size, pre-split operating performance as measured by return on assets, pre-split firm returns, leverage, and the post-split share price level.

Practical implications

The study may be of interest to investors considering investing in stocks that have undergone reverse splits.

Originality/value

The research sheds light on which reverse splitting firms are most likely to survive and for how long.

Citation

L. Neuhauser, K. and H. Thompson, T. (2014), "An examination of the survivability of reverse stock splits", International Journal of Managerial Finance, Vol. 10 No. 3, pp. 293-311. https://doi.org/10.1108/IJMF-09-2013-0101