Applicability Study Of Signal Theory About Stock Split In China's Stock Market

In China, the way for the listed company to pay dividends includes cash dividends and non-cash dividends. Stock split is a common distribution way of non-cash compensation in A-share market. After stock splitting, the total share capital will expand according to the coefficient of bonus shares, which causes the reduction of earnings per share and stock price.Although stock-splits don't change the cash flow and financial situation of companies, after news about bonus shares distribution plan is announced in A-share market, the stock prices often rise significantly. The rising prices induce a large number of market speculators to support and buy the stocks, which pushes the stock prices higher. The majority of investors'enthusiasm will ultimately lead to a situation that stock splitting is more popular than distributing cash, the more the better.Western scholars studied dividend policy of listed companies very early and have formed several mature theories of stock splitting:signal theory, the theory of optimal price range, improving the liquidity theory, the tax selection theory, the theory of optimal bid-ask spread and adjustment of equity concentration theory.Signal theory is one of core theories about stock splitting, which explains the behavior of splitting from the perspective of information economics. In the situation investors can't get the same information, the management of listed companies can deliver information about the company's future growth prospects to the market through the implementation of stock splitting distribution. Announcements of stock splitting often imply the information that companies'net profit will increase because just when the management is very optimistic about the stock price, they'd like to reduce stock price to a lower range through the stock splitting distribution.Simultaneously, in the announcement the change of cash dividend also deliver the news about company future development outlook to market investors. If the listed companies increase the cash dividend, it means they can have the sufficient strength to maintain the higher cash dividend on time, which shows the management's optimistic attitude. If the cash dividend is reduced in announcement, investors would be suspicious of the company's operating conditions, and they would be pessimistic about company future growth prospects.Due to historical reasons and the characteristics of China's stock markets, there is a larger gap between China's stock markets and the western developed stock markets:compared with the foreign stock markets, Shanghai and Shenzhen stock markets are not standardized, and the dividend policies formulated by listed companies are more arbitrary and discontinuous. These differences probably affect the applicability of western signal theory about stock split in China's stock market. This paper studies applicability of signal theory by analyzing the stock split in 2001-2007 in Shanghai and Shenzhen stock markets. The results show that signal theory don't apply to stock split in China's stock market.