Our hypothesis generates the following two predictions. First, if some firms split their stocks to keep their equity value from falling (perhaps to delay a market correction of their overvalued equity), we expect these firms to have poorer long-run stock performance compared with firms that split stocks for nonmanipulative reasons. Given that we use earnings quality as a proxy for firms’ intentions to manipulate, we expect splitting acquirers with lower earnings quality to perform worse in stock returns compared with splitting acquirers with higher earnings quality, after controlling for the effect of earnings quality on stock returns. Second, because acquirers benefit more from overvalued equity in stock-swap.
