On Existence of an 'Optimal Stock Price' : Evidence from Stock Splits and Reverse Stock Splits in Hong Kong

We analyze a sample of stock splits and reverse stock splits on the Stock Exchange of Hong Kong (SEHK) over the period 1986 through 1992. Consistent with studies on stock splits and reverse stock splits made in the U.S. capital markets, our analysis shows that stock splits are associated with a positive and significant stock market response, while reverse stock splits are associated with a negative but statistically insignificant price effect. We also investigate the "optimal price range" hypothesis, which states that firms choose the split factor (SF) as a device to return the stock price to a "preferred price range." Our result suggests a positive relation between the magnitude of the SF and the deviation of the pre-split stock price from the historical price level in the stock split sample. However, we do not find a systematic pattern affecting the use of the SF in the reverse split sample