Return predictability: The dual signaling hypothesis of stock splits

Prior studies suggest that combining stock split signal and accrual signal is an effective means of communicating managerial optimism, and that stock split is an exception to the accruals anomaly. We posit that, although stock splits are mostly conducted by optimistic managers and are followed by positive long-term returns, many are conducted by overoptimistic and/or opportunistic managers and are followed by negative long-term returns. Disentangling optimistic and overoptimistic/opportunistic managers helps ex-ante identify bad splits that are followed by significantly negative abnormal returns. A zero-investment strategy based on our findings can generate economically and statistically significant positive returns.