Stock splits: Tests of the earnings signaling and attention directing hypotheses using analysts forecasts and revisions

Previous studies have found that stock split announcements (SSA) convey earnings information to the market. Unlike previous efforts, a study monitors earnings performance relative to long-term analyst forecasts and analyst forecast revisions. The major findings are: 1. Earnings performance of splitting firms is favorable relative to preevent long-term analyst (Value Line) forecasts. 2. Analysts significantly revise earning forecasts upward in response to SSAs. 3. In the case of stock split announcing firms, there is a high correlation between future earnings performance and analyst forecast revision. These findings indicate that SSAs convey permanent earnings information to the market, and security analysts scrutinize the earnings signal at the firm specific level. The results support both the earnings signaling hypothesis and the attention directing hypothesis concerning stock split events.