Only a firm’s management and insiders know the exact motive for a stock split; outsiders cannot observe it directly. To address this challenge, we use earnings quality to proxy for the firm’s propensity to engage in manipulative activities. If a firm intends to manipulate its equity value prior to an acquisition, it may not confine itself to stock splits. Another way to achieve this goal is through earnings management, as documented by Erickson and Wang (1999) and Louis (2004). Therefore, we expect that the lower the quality of a firm’s earnings before the acquisition announcement, the more likely the acquirer is to use stock splits as.
