The effect of accounting accruals on the market reaction to a stock split: A comparison between pure and opportunistic stock splits

Using stock splits from 2000 through 2012 in the Korean stock market, this paper examines whether managers use accounting accruals to signal private information and the discretionary component of accruals is a useful proxy for the firm’s information risk. Louis and Robinson(2005) find that managers report significantly positive discretionary accruals prior to stock split and that the market positively prices the pre-split abnormal accruals at the split announcement data, suggesting that the market construes the pre-split abnormal accrual as a signal of managerial optimism. Based on their study, we investigate whether discretionary accruals can be used as tools to reveal private information in the Korean stock market by analyzing the association between the market reaction of stock split and the pre-split discretionary accruals In addition, Kim et al.(2012) suggest that splitters with subsequent corporate events may have more opportunistic motives to maximize the effects of other corporate events. Consistent with their study, we also analyse whether the accruals quality is an effective proxy for information risk of firms that split stocks as a manipulation tool. Based on our analysis, we find no evidence that discretionary accruals are correlated with the market returns of all the firms that split stocks with and without subsequent corporate events. This result implies that the Korean stock market may perceive the abnormal accruals more as a manager’s opportunistic behavior rather than as a means of signaling favorable private information conveyed by manager.