Khóa luận tốt nghiệp: Verifying the signals from stock splits on the Vietnamese stock market

The study uses an Event Study model to draw conclusions about the impact of stock split announcements and the relationship between signal theory and price volatility in the Vietnamese st

VIETNAM NATIONAL UNIVERSITY, HANOIUNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

~ #@es@|LE]x»s@& VERIFYING THE SIGNALS FROM STOCK SPLITS

ON THE VIETNAMESE STOCK MARKET

Lecturer PhD Vu Thi Loan

Student Vu Mai Linh

ID Card 19050685

Class QH2019E TCNH CLC 4

Ha Noi, May 2023

VIETNAM NATIONAL UNIVERSITY, HANOIUNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS 2023

VERIFYING THE SIGNALS FROM STOCK SPLITS

ON THE VIETNAMESE STOCK MARKET

Lecturer PhD Vu Thi Loan

Student name Vu Mai Linh

Student code 19050685

Class QH2019E TCNH CLC 4

Ha Noi, May 2023

After four years of studying and training at the University of Economics and Business, Ihave had the opportunity to learn, enhance, and acquire new knowledge as well asadvanced research and methodological skills, which have contributed to the successfulcompletion of this thesis Firstly, I would like to express my sincere gratitude to the

administration of the University of Economics and Business, and the leadership of the

Faculty of Finance and Banking, as well as all the lecturers and professors who have

created favorable conditions and provided research support during my studies.

In particular, I would like to send my deepest thanks to my thesis advisor, Ph.D Vu ThiLoan, for her dedicated guidance, instruction, and encouragement throughout the process

of my research Despite my shortcomings during the implementation of the thesis, I hope

to receive constructive feedback to improve the quality of the work

Once again, I would like to express my sincere appreciation to all those who havesupported and contributed to the completion of this thesis

I certify that this research paper is our own work under the guidance of Ph.D Vu Thi Loan.The data and materials used in this research are clear and truthful The results andevaluations have not been published in any other research paper

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CHAPTER 4: RESEARCH FINDINGS ON SIGNALING THEORY TO STOCK SPLIT

ANNOUNCEMENTS OF COMPANIES LISTED ON THE VIETNAMESE STOCK MARKET 32

4.1 An overview of the Vietnamese economy and stock market in 2022 - - -«+ 32 4.2 Overview of companies conducting stock splits in Vietnam -c+cc+ccsssexeeeers 34

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LIST OF FIGURES

Figure 2.1: Signaling Timeline 13Figure 4.1: GDP for the period 2011-2022 (%) 32Figure 4.2: Number of securities investment accounts opened annually and VN- -Index movements at the end of the year

Figure 4.3: Cumulative Average Abnormal Return Trend 37

37

Figure 4.4: Average Abnormal Return Trend

LIST OF DIAGRAMS

Diagram 3.1: Research process 23

Diagram 3.2 Event Study Methodology 28

LIST OF TABLES

Table 4.1: The results of the analysis of average abnormal return (AAR) and

average cumulative abnormal return (CAAR) during the time frame of the

announcement of the stock split

35

CHAPTER 1: INTRODUCTION

1 The significance of the topic

The stock market plays a vital role in the development of an economy and is an

indispensable part of the financial system of each country Investors are highly concernedabout information and the quality of it, and how it affects the stock price Any business

with stocks traded on the exchange is cautious when giving information to the public and

investors because that information reflects the face and status of the company to thepublic and investors Stock price fluctuations and investors’ attraction to stocks dependnot only on the financial figures in the report but also on the information transmittedthrough the media in the market This information can come from financial companies,securities companies, and analysts aiming to provide an overview of the stock market forinvestors Therefore, investors’ reactions to information disclosed on the stock marketare a matter of concern for many researchers

Stock split is a technical operation that is quite common among listed companies Intheory, stock split simply increases the number of shares without changing the company'scash flow Therefore, stock split does not change the company's value However, many

experimental studies have shown that stock split information has certain effects on the

price and liquidity of stocks Some previous studies have found that stock splitinformation has a positive effect on the price and liquidity of stocks (Wu and Chang, 1997;

Kuse and Yamamoto, 2004; Aduda and Caroline, 2010; Li et al., 2015), while some other

studies have found the opposite results (Lammoureux and Poon, 1987; Conroy et al.,

1990; Leemakdej, 2007; Patel et al., 2016).

In recent years, stock splits of listed companies have become quite common on the HOSE

How investors react to stock split information and the relationship between signal theory

and stock price volatility is a question that many people ask, but until now, there has been

no satisfactory answer Therefore, the aim of this research is to search for empirical

evidence to answer this question through the use of data including 56 stock split events

of 38 listed companies on the Ho Chi Minh City Stock Exchange and Hanoi Stock Exchange

in 2022 The study uses an Event Study model to draw conclusions about the impact of

stock split announcements and the relationship between signal theory and price volatility

in the Vietnamese stock market From there, recommendations can be made to benefitinvestors in evaluating the prospects of companies and considering them in the decision-making process

2 Research objectives and tasks

2.1 Research objectives

The objective of this research is to test the signaling theory using the stock split activities

of listed companies on the Vietnamese stock market

Based on the research findings, recommendations can be made for business managers todevise appropriate policies, while aiding investors in making accurate predictions on thefuture returns of stocks

Providing some suggestions for investors and enterprises before making decisions to

trade securities and announce stock split information.

3 Research question

Based on the research objectives, in this thesis, the author will focus on studying and

explaining the research questions:

1 The impact of the stock split announcement on the stock market in Vietnam in recent

times?

2 The relationship between signaling theory and stock price volatility

3 For investors and other organizations, what purposes can they use the effect of thestock split announcement on stock prices for?

4 Research objectives and scope

4.1 Research object

For the purpose of conducting research to verify the signal theory from the stock splitactivities of listed companies in the Vietnamese stock market using the event studymethod The study focuses on analyzing and processing data to produce investmentmodels along with investment recommendations, without delving deeply into marketanalysis to make decisions The decisions made depend on the skills and preferences ofeach investor

4.2 Research scope

The study was conducted based on 56 samples of stock split events data from listedcompanies on the Vietnam stock exchange from January 2022 to December 2022,including: closing prices of trades, VN-Index, and other necessary data

5 Research methods

The study uses the event study method to measure the impact of stock split information

announcements on stock price changes Therefore, this article will design the studyaccording to the correct sequence and standards of the event study method

Research Event

The article focuses on studying the event of the announcement of stock split information

on the changes in stock prices and trading volume of stocks The event date is the date of

the information announcement on vietstock.vn, cafef.vn If the information is announced

during trading hours, the event date is the announcement date If the information is announced after trading hours or falls on a holiday, the event date is the next trading day.

6 Contribution of research

This research can be utilized to assist investors in predicting stock price trends ofbusinesses and developing profitable investment strategies Additionally, the researchfindings can provide critical signals and act as references for individual investmentdecisions The study includes suggestions to the Securities Company and related parties

to improve transparency of the market and elevate investors’ proficiency The researchalso emphasizes the significance of sustaining a company's growth

7 Structure of the study

In addition to the introduction, conclusion, attached appendices, the research paper isbuilt

through 4 main chapters:

- Chapter 1: Introduction

- Chapter 2: Research overview and theoretical basis on the theory of signal theory

from stock split activity

- Chapter 3: Research Methodology

- Chapter 4: Research results of analyzing the stock price volatility in relation to theannouncement of stock split in Vietnam

- Chapter 5: Summary, conclusions and recommendations.

CHAPTER 2: RESEARCH OVERVIEW AND THEORETICAL BASIS ON THE THERY OF

SIGNAL THEORY FROM STOCK SPLIT ACTIVITY

2.1 Research overview

2.1.1 Overview of domestic research

To date, there have been several studies published on the impact of stock splits on the

prices and liquidity of stocks Notable studies include that of Truong Dong Loc and Ngon

Ly Quan (2019), which investigated the effect of stock split information on the price andtrading volume of listed stocks on the Hanoi Stock Exchange from 2015 to 2017 Theauthors used the event study method in financial economics The events studied included

daily closing prices and trading volumes, which were the total volume of matched orders

in the session This study provides additional empirical evidence on the impact of stocksplit information on the price and liquidity of listed stocks on the Vietnam stock market.The sample consists of 237 stock split events of 150 listed companies on HOSE from 2015

to 2017 The statistical analysis results reveal that the prices of the stocks changed aroundthe day of the stock split announcement Specifically, the stock price increased by 0.33%two days before the release of the information and continued to increase by 0.59% in thenext session after the announcement Furthermore, the price increase of the stocks wascontinuously maintained for 10 trading sessions following the announcement.Additionally, the study confirmed the positive impact of stock split information on theliquidity of stocks The liquidity of the stocks increased significantly throughout theresearch period, especially in the two sessions after the announcement Based onempirical evidence, it can be concluded that stock split information has a positive impact

on the price and liquidity changes of listed stocks on HOSE

Vo Xuan Vinh and Dang Buu Kiem (2016) conducted a study on the market reactionthrough stock prices to announcements of changes in the VNM fund's stock portfolio inthe Vietnamese stock market from 2009-2015 The authors used the event study method

in financial economics The events studied included announcements of added or removedstocks, increased or decreased stock holdings in the VNM fund's portfolio The researchresults showed that the market did not react to information on changes in the VNM fund'sstock portfolio and holdings on the announcement date, but the market showed aresponse before and after the announcement The study found evidence supporting thetheory of imperfect substitution for the case of adding stocks to the VNM fund's portfolio(prices increase and remain at a new equilibrium level) and increasing stock holdings inthe VNM fund's portfolio (prices decrease and remain at a new equilibrium level) This

study offers some recommendations for investors and policy-makers, stating thatVietnamese investors, particularly individual investors, need to have a comprehensive,clear, principle-based, and long-term investment strategy designed specifically for eachindividual or organization to avoid short-term distorted reactions leading to blind and

uninformed investment decisions, such as crowd-following investment or foreign

organization trading Investors can pay more attention to stocks predicted to be added tothe VNM fund's portfolio Finally, policy-makers need to have programs to promote andenhance financial knowledge for investors to contribute to the stability and sustainabledevelopment of the stock market during the current period of deep international

integration.

2.1.2 Overview of foreign research

There have been many studies around the world evaluating the stock price volatility of

companies surrounding stock split announcements However, the results of these studies

are still not entirely consistent with each other Some studies indicate that stock splitshave a positive impact on the price and liquidity of stocks, while some have differentresults

Elfakhani and Lung (2003) studied the impact of stock splits on the stock price of theCanadian Stock Exchange from 1977-1993 Using the event study method, the authorsconcluded that stock splits have a positive impact on stock prices and lasted for about 11days around the stock split announcement date On the Japanese Stock Exchange, Kuseand Yamamoto (2004) found cumulative abnormal returns during the 30 trading daysafter the stock split announcement compared to the 30 trading days before theannouncement This result led the authors to conclude that the market had a positivereaction to the stock split announcement The positive impact of stock splitannouncements on stock prices was also found in the study by Li and colleagues (2015).The authors explained that the price of stocks increased after the stock split

announcement because the liquidity of the stocks increased.

On another note, several empirical studies reported excess returns on the announcement

and effective dates of stock splits Positive excess returns were discovered in other

markets as well

Aduda and Caroline (2010) studied the impact of stock splits on the price and liquidity ofstocks listed on the Nairobi Stock Exchange (Kenya) Applying the event study method,the authors found that stock splits have a positive impact on the trading volume of stocks.Rudnicki (2012) used the event study to study the impact of stock splits on the liquidity

of stocks listed on the Warsaw Stock Exchange and the Vienna Stock Exchange between2000-2011 The research results showed that the liquidity of stocks had increasedsignificantly after the stock split announcement Huang and colleagues (2015) studied theimpact of stock split information on the liquidity of stocks on the NYSE, AMEX, andNASDAQ Stock Exchanges from 1960-2010 The research results showed that most stockshad significantly increased liquidity around the stock split announcement date After theannouncement date, the liquidity of the stocks declined, but was still higher than beforethe split However, after the ex-dividend date, the liquidity dropped below pre-split levels.

In contrast to the above studies, some studies have shown that stock splits have a negativeimpact on the price of stocks Szewczyk and Tsetsekos (1993) discovered that theproportion of institutional investors increased following a stock split Additionally, it was

expected that investors would react negatively if the split was implemented to serve the

executives’ interest Gorkittisunthorn et al (2006) found that the percentage of insidersdecreased after the split, consistent with the asymmetric information framework ofmarket microstructure, which suggested that less informed traders would result in

narrower bid-ask spreads, thus supporting the liquidity hypothesis Using the traditional

event study method, they observed positive responses on both the announcement andeffective dates Byun and Rozeff (2003) analyzed the long-term consequences of 12,747

stock splits conducted between 1927 and 1996 In contrast to most prior studies, they

concluded that stock splits were essentially value-neutral transactions

In their study, Goyonke et al (2006) investigated the relationship between stock splitsand liquidity using an after-event window spanning up to six years The findings of theresearch indicated that split firms initially experienced a decline in liquidity However, thedecline was temporary and lasted for only the first 9 to 12 months The study also foundthat split firms experienced an increase in liquidity in the long run, often observed 24months after the split On the other hand, Gupta and Kumar (2007) did not find anyannouncement effect associated with stock split in India In previous studies, Baker andGallagher (1980), Lakonishok and Lev (1987), and Lamoureux and Poon (1987)suggested that executives used stock splits as a defense mechanism against takeoverthreats by increasing the number of shareholders, making it difficult for potentialacquirers to control the company's stake

Leemakdej (2007) conducted research on 100 stock splits in the Stock Exchange ofThailand and found that there were significantly negative returns during the 20 days

before and 18 days after the effective date of the split, with the most significant returns

concentrated around the event date This finding contrasted with other studies thatobserved positive returns around stock split dates The study also noted an increase inearnings and dividends after the split, as well as an increase in both the proportion oflarge shareholders and the number ofinvestors, with the bid-ask spread being narrower.However, trading volumes were lower after the split The study further found that thesystematic risk was lower during the split date, but it returned to previous levels after thesplit In a study investigating the long-term effects of stock splits in the U.S market from

1950 to 2000, Boehme (2001) found that abnormal returns were only detected in the firstyear and subsided thereafter It was also reported that significant abnormal returns onlyoccurred during the 1975-1987 period due to lower systematic risk

2.1.3 Research gap

Research on the Vietnamese market regarding the impact of stock split announcements

and price fluctuations in various aspects of this issue is presently limited The small

sample sizes of existing research and varied findings create difficulties for readers researchers) to select a study as a basis for application In fact, the two Vietnamese studiesprovided in the introduction above indicate that stock split research in the Vietnamesemarket is still relatively new, and outdated as most were conducted more than 3 yearsago Primarily, these studies measure the effect of dividend policy on market value orfluctuations in stock prices without providing specific signals Therefore, it is necessary

(non-to develop more diverse research on this issue with sample sizes from multiple sec(non-tors,economic periods, study timeframes to clarify the signals from businesses' stock splitsand stock reactions to dividend announcements on the Vietnamese stock market

2.2 Theoretical foundations of signaling theory, stock splits and extraordinary

in certain markets, some participants lack information that others wish to convey

(Spence, 2002) While Spence acknowledged that this was unlikely, he emphasized thatwhat emerged was a serious effort to capture the informative elements of various marketstructures Ultimately, the theory's significance lies in its ability to assign costs to

information acquisition processes that effectively address information asymmetries in a

diverse array of economic and social phenomena.

Numerous theories and empirical investigations have been carried out since the release

of the seminal study by Fama, Fisher, Jensen, and Roll (1969) that examines the shareprice performance of splitting corporations and the perplexing market response to stocksplits The signaling theory, the optimal trading range hypothesis, the liquidity hypothesis,the tax option hypothesis, and the managerial entrenchment hypothesis are the mostnotable hypotheses

According to the signaling hypothesis (Grinblatt, Masulis, and Titman, 1984), stock splitsreveal information about the current performance and potential of the dividingcompanies The signal must be expensive in order to be reliable and trustworthy Becausethe fixed portion of the brokerage charge raises the post-split per-share trading expenses

of the lower priced shares (such as odd-lot trading costs and administrative costs), stocksplits are expensive signals (Brennan and Copeland, 1988; Brennan and Hughes, 1991).The signaling theory is supported by the numerous empirical research (e.g., Ikenberry,

Rankine and Stice, 1996; Mukherji, Kim and Walker, 1997; Ikenberry and Ramnath, 2002) that find positive anomalous returns surrounding the announcement of a stock split.

A signal resulting from management policy, such as dividend policy, is connected tosignaling theory The goal of the policy is to inform investors (as external parties) aboutthe company's prospects and to be helpful to them while making investment decisions Ascan be seen from its impact on stock returns, management can use a policy as a signalabout a company's value if investors find the information's content to be significant(Abdullah, 2002; Brigham & Houston, 2010; Suwanna, 2012; Zare et al., 2013; Scott, 2015;Puspitaningtyas, 2017, 2018)

According to signaling theory, the management is motivated by maximizing his earningsand possesses correct knowledge about the company's worth that investors may not have.This presumption is predicated on the presence of asymmetric information, which is thecircumstance in which one party knows knowledge that another party might not have Ifthe management does not provide all the information he knows regarding the worth ofthe firm, asymmetric information will result, impacting investor judgment throughout theinvestment decision-making process

Reducing information imbalance between two parties is at the core of signaling theory(Spence, 2002) For instance, Spence's (1973) important work on labor markets showed

how a job candidate may act in ways to lessen information asymmetry that hinders

potential employers' capacity for hiring Spence demonstrated how the pricey signal ofademanding higher education allows high-quality potential workers to set themselvesapart from low-quality possibilities This research sparked a massive body of literaturethat applies signaling theory to selection scenarios that happen across a variety of fields,from biology to anthropology (Bird & Smith, 2005).

Several instances have been used by financial economists to showcase the generalrelationships in signaling theory In particular, Ross (1973) and Bhattacharya (1979) havesuggested that firm debt and dividends respectively signal firm quality These modelshold that only high-quality firms can make long-term interest and dividend payments,while low-quality firms cannot sustain such payments Consequently, these signals cansignificantly influence outsider's perceptions of firm quality, such as lenders and

investors As such, many of the fundamental concepts and constructs of signaling theory

are grounded in literature from finance and economics (Riley, 2001)

Although quality is usually the distinguishing factor in most signaling models, itsdefinition can be interpreted in various relevant ways For the purposes of this review,

quality refers to the signaler's unobservable ability to cater to the needs or demands of an

outsider observing the signal Spence's classic example depicts quality as theunobservable ability of an individual signaled by fulfillment of educational requirements

for graduation In Ross's scenario, quality refers to the unobservable ability of an

organization to make future positive cash flows, which can be signaled through financialstructure and/or managerial incentives While quality shares similarities with terms such

as reputation and prestige, we posit that these notions are mainly socially constructedand stem from the signaler's unobserved quality (or lack thereof) (Kreps & Wilson, 1982;Certo, 2003)

2.2.1.2 Key Signaling Concepts

Figure 2.1 presents an illustration of the primary components of signaling theory in theform of a timeline The main actors in signaling theory are the signaler and receiver, withthe signal itself representing the information being conveyed between them The figurealso displays potential feedback loops to the signaler and the signaling environment.However, we reserve further discussion of these supplementary mechanisms for thefollowing section, where we examine signaling within the management literature In someinstances, multiple signalers, receivers, and/or signals may be involved For example,various individuals like investors and bondholders may observe and interpret multiple,

potentially competing, signals from distinct entities within a single firm To present the

core theoretical concepts in a simple manner, we restrict our focus to single signaler and

receiver dyads This approach deviates little from how signaling theory has traditionally

developed, centered on one-to-one or transaction-specific communication

Figure 2.1: Signaling Timeline

t=0 t=1 t=2 t=3

SIGNALER SIGNAL is sent to RECEIVER observes FEEDBACK is sent (person, product, or firm) receiver and interprets signal to signaler

has underlying quality Receiver chooses

person, product, or firm.

or executives, who possess non-public information about individuals (Spence, 1973),

products (Kirmani & Rao, 2000), or organizations (Ross, 1977) Broadly speaking,insiders acquire both positive and negative information, which outsiders would finduseful For instance, insiders may obtain information about the organization's products

or services, such as early-stage research and development findings or preliminary salesoutcomes reported by sales agents Insiders may also have access to information aboutvarious aspects of the organization, such as pending lawsuits or union negotiations Insummary, this proprietary information gives insiders a unique perspective regarding theinherent quality of a particular aspect of the individual, product, or organization

Signal: Insiders have access to both favorable and unfavorable private information and

must weigh the decision of whether to communicate it to outsiders Signaling theory

primarily centers on the intentional communication of positive information to conveypositive organizational attributes Nonetheless, some scholars have examined instanceswhere insiders communicate negative information about organizational attributes For

example, the issuance of new shares of a company usually constitutes a negative signal

because executives may do so when they think their firm's stock price is overvalued(Myers & Majluf, 1984) Nonetheless, it is crucial to note that insiders do not typicallyintend to send these negative signals to outsiders to lessen information asymmetry,although this is frequently an unintended consequence of their actions

Conversely, signaling theory primarily concentrates on the deliberate actions insiders

take to convey positive, unobservable qualities of themselves While insiders may

demonstrate overt actions to outsiders, not all of them serve as effective signals Instead,there exist two primary attributes of effective signals The first is signal observability,

which pertains to the extent that outsiders can detect the signal If the actions of insiders

are not easily noticeable by outsiders, it becomes difficult to use those actions to signal to

receivers.

Signal cost is the second essential characteristic of effective signals, in addition toobservability, since being observable alone is not enough The notion of cost in signalingtheory is so significant that some refer to it as the "theory of costly signaling" (Bird &Smith, 2005) Costs associated with signaling can be absorbed differently by varioussignalers For instance, obtaining ISO9000 certification is costly because it is a time-consuming process, and these costs make it challenging for signalers to engage in falsesignaling or cheating However, for a high-quality manufacturer, IS09000 certification isless expensive than for a low-quality manufacturer since the latter must implement more

significant changes to earn certification Ifa signaler does not possess the inherent quality linked with the signal but perceives that the benefits of signaling exceed the costs of

producing the signal, the signaler may attempt false signaling This situation may lead to

misleading signals flooding the market until recipients learn to disregard them.

Consequently, to maintain effectiveness, signal costs must be structured in such a waythat false signals do not produce more benefits to signalers than honest signals1

Receiver: The receiver of the signal represents the third element in the signaling timeline

As per signaling models, receivers are outsiders who lack information about theorganization but would like to obtain it However, signalers and receivers have partiallyopposing interests, implying that successful deceit could benefit the signaler at theexpense of the recipient (Bird & Smith, 2005) For signaling to occur, the signaler mustbenefit from some action by the recipient that they would not have taken otherwise (i.e.,signaling must have a strategic impact); this typically involves selecting the signalerinstead of other alternatives For instance, the receiver may make a decision concerninghiring, purchasing, or investing Receivers in studies testing signaling theory includeshareholders (Certo, Daily, & Dalton, 2001) and debt holders (Elliot, Prevost, & Rao,

1 In contrast to signaling theory, which primarily focuses on expensive signals (Riley, 2001), researchers have

expanded their study of information asymmetries to take into account less expensive means of

2009), while in marketing studies, customers are the receivers (Basuroy, Desai, &

Talukdar, 2006; Rao, Qu, & Ruekert, 1999) An important aspect of signaling is that these

outsiders stand to benefit (either directly or in partnership with the signaler) frommaking decisions based on information obtained from such signals Shareholders, forinstance, would benefit from purchasing shares of firms that signal profitable futures,while customers would gain from buying goods and services that are associated withhigh-quality signals

2.2.2 Stock splits

2.2.2.1 Concept and theoretical basis of stock split

A signal resulting from management policy, such as dividend policy, is connected tosignaling theory The goal of the policy is to inform potential investors (who are third

parties) about the company's prospects and provide investors usefulness as a factor to

take into account while making investment decisions Management can utilize the policy

as a signal about a company's worth if investors believe the information's substance to be

essential, as can be demonstrated by its impact on stock returns (Suwanna, 2012; Zare et

al., 2013; Scott, 2015; Puspitaningtyas, 2017, 2018; Abdullah, 2002; Brigham & Houston,2010);

According to signaling theory, the manager is motivated by maximizing his earnings and

possesses correct knowledge about the company's worth that investors may not have.

This presumption is predicated on the presence of asymmetric information, which is thecircumstance in which one party knows knowledge that another party might not have Ifthe management does not provide all the information he knows regarding the value of thefirm, asymmetric information will result, impacting investor judgment throughout theinvestment decision-making process Asymmetric information causes managementpolicies to send a signal that is particularly significant to investors or the general public.Investors might anticipate that the signal will provide his perspective on the company'sfuture The goal of signaling theory is to lessen information asymmetry for investors.However, the capacity of investors to assess information affects the signal quality (Brau

& Carpenter, 2012; Zare et al., 2013; Su et al., 2014; Karasek & Bryant, 2015; Shetty &Sundaram, 2019)

Stock splits, which often occur in the financial markets4, are frequently linked to

anomalous results Fama et al (1969) were the first to discover proof of aberrant returns

in the periods after a stock split, as was previously mentioned More recently, Desai and

Jain (1997) show that the purchase and hold average for stock splits for 1 and 3 year

abnormal returns are, respectively, 7.05% and 11.87% The 1 and 3 year abnormal

returns for reverse splits are -10.76% and -33.90%, respectively We recommend Easley

et al (2001) and He and Wang (2012) for a summary of the empirical research on stocksplits

The ownership and value of the company shouldn't be significantly affected by stocksplits, according to theory Splits merely result in more shares being issued and lessexpensive shares being issued While many investors believe stock splits to be a sign of acompany's sound financial condition, it is suggested that the split event itself should not

be interpreted as a prediction of the stock's future performance

Stock splits are used as instruments to realign the share price to a desirable price range

so that it is cheaper for small investors to purchase round quantities of shares, according

to the optimum trading range hypothesis A stock split is appropriate to increase the

marketability of the shares if the pre-split share price was high (Baker and Gallagher,1980; Lakonishok and Lev, 1987; McNichols and Dravid, 1990) The post-split shares aremade more appealing to investors with less wealth because of the decrease in trading

price caused by stock splits Moreover, according to Angel (1997), stock splits can be

employed to raise the share price to a level where the institutionally required minimumabsolute tick size is at its best

The stock split reduces the conversion ratio of shares When a company performs a stock

split, the number of shares increases but the conversion ratio decreases, resulting in acorresponding decrease in the stock price However, the total market value of thecompany remains unchanged, because while the conversion ratio and stock pricedecrease, the total number of shares increases

Increasing the number of shares can increase borrowing capacity and attract smallinvestors, who may have found it difficult to own a share of a company with a previouslyhigh stock price Shareholders can also benefit from the stock split because the lowerstock price may make it more attractive to small investors, and their ownershippercentage will remain the same after the stock split Owning more shares, and increasingmarket value, brings significance to all parties seeking benefits and profits

2.2.2.2 Types of stock splits

Using different forms of stock split will have different impacts on the stock price in the

market and affect the interests of investors in various ways Each company will choosethe most suitable form of stock split to serve its own plan The decision to split stocks is

the right of joint-stock companies and is usually determined at the annual general meeting

of shareholders Therefore, the timing of the stock split will depend on the schedule of

AGM of each specific company.

However, typically, joint-stock companies often split stocks during periods with highliquidity in the Vietnamese stock market This time usually falls at the end of the year or

the beginning of the new year, as well as at the end of the second quarter or early third

quarter, when the buying and selling power of investors increases and the market isgrowing However, this is only a common trend of joint-stock companies, and the timing

of stock splits may vary depending on the business situation and development plan ofeach specific company

Joint-stock companies can choose one of the following four forms to split their stocks:stock split, issuance of shares to existing shareholders, issuance of private shares, and

Employee Stock Ownership Plan (ESOP).

The most common form is stock split wherein companies use undistributed profits toissue additional shares to existing shareholders By issuing additional shares to paydividends, dividends in the form of stock do not generate cash flow out of the company,

unlike cash dividends When implemented in this form, the number of shares will increase, the profit on each share (EPS) will decrease, and it will affect the adjustment of

the price on the ex-dividend trading date Funds cannot enter the company, and the

essence of this action is that the company increases the number of outstanding shares

without generating any cash flow into the company The equity capital does not change,and the investor's ownership ratio remains the same

Paying dividends in the form of shares can help shareholders and businesses avoid thedisadvantages of cash dividends For shareholders, receiving stock dividends helps themavoid corporate income tax and personal income tax levied on cash dividends, resulting

in a higher after-tax return For businesses, paying stock dividends will not change theequity capital or the ownership ratio of shareholders, as they would all receive aproportional percentage of additional shares issued Additionally, issuing additionalshares will cause the stock price to adjust downward correspondingly, making it easierfor investors to access the stock and increasing the stock trading liquidity In well-performing companies, investors often prefer to receive stock dividends rather than cashdividends

In another aspect, the decrease in the stock value can be an advantage for investors, but alimitation for businesses When the number of shares increases but the market

capitalization of the company remains constant, the stock price in the market decreases.

This also means that the company's capital raised from stock trading on the market

decreases If the company retains cash for unprofitable investments, the decrease in stock

price will cause investors to miss the opportunity to receive cash dividends and also losethe ability to make a profit from buying and selling the stock at a price differential

Next, the second form of stock split commonly used by businesses in Vietnam is the

issuance of shares to existing shareholders This involves the company issuing additionalshares to existing shareholders, meaning the company increases the number of sharesavailable for sale and sells all those shares to all shareholders in proportion to theircurrent shareholding in the company The additional shares issued to existingshareholders are considered bonus shares or preference shares that have no restrictions

on voting rights and are priced at a discount Therefore, this is considered a benefit

exclusively for existing shareholders of a listed company The procedure for issuing

shares to existing shareholders can be quite complicated, as it is not always possible toissue shares as desired Typically, this form of issuance has a specific purpose, which must

be announced in the company's issuance procedure

For businesses, issuing shares to existing shareholders increases the liquidity of the

company's stock, making it more flexible and traded more frequently than before Thisform is usually suitable for companies whose stock is not currently attracting attention,

or stocks with low liquidity Additionally, this form of issuance increases the number of

shares available, decreases earnings per share (EPS), and will affect the price adjustment

on the ex-dividend trading date Funds will flow into the company when it issues newshares, and investors will have to invest money to own these shares Funds from thepublic will flow into the company The equity capital will increase, and the ownershipratio of investors will decrease if they do not exercise their right of purchase and willremain unchanged if they do

Another form of stock split commonly used by businesses in Vietnam is the issuance ofprivate shares This involves the issuance of securities that are only sold within a certainrange of buyers Typically, the buyers are strategic shareholders or professional investorsthat the company targets The issuance of private shares is usually subject to theadjustment of the Company Law, such as resolutions of the shareholders’ general meeting,

through information such as the issuance plan, the plan for using the funds raised,

determining the specific target and number of investors

On the other hand, as the number of shares increases, earnings per share (EPS) will

decrease, but this does not affect the price adjustment on the ex-dividend trading date.

Funds will flow into the company, and the equity capital will increase while the ownership

ratio of investors will decrease in percentage terms.

Finally, the Employee Stock Ownership Plan (ESOP) is a form of preferential shares thatbusinesses only sell at a lower price than the market price to employees who contribute

to the company's development, typically members of the board of directors, executive

board and employees of the company This form has the peculiar point that funds will flowinto the company if purchased at a preferential price and no funds will flow in if purchased

at 0 VND When purchased at 0 VND, the equity capital of the business remains unchangedand will increase if purchased at a preferential price This form is applied internally toemployees at the company and will reduce the ownership ratio of investors when the split

is carried out The total number of shares issued in every 12 months does not exceed 5%

of the total number of outstanding shares of the company.

2.2.3 Theoretical basis of signal in stock splits

The signaling hypothesis suggests that the reason for stock splits is to convey informationfrom managers to shareholders The signal theory describes the behavior of the twoparties involved in communication: the signal sender and the signal receiver The sendermust choose whether or not to send information, the quality of the information and how

to transmit the information to the receiver On the other hand, the receiver must decodethe signal to fully understand the information conveyed The information provided may

be positive, negative or incomplete, which means there is always an informationasymmetry between the signal sender and the signal receiver By announcing a stock split,

a company can reduce any information imbalances that may exist between the twoparties The reduction in stock price resulting from a stock split signals management'sconfidence in future earnings (as evidenced by Fama, Fisher, Jensen, and Roll in 1969) It

is possible to argue that management only splits a stock if they believe the current level

of stock price (and earnings) to be permanent, similar to Lintner's (1956) model of

dividends, which is supported by empirical evidence provided by Benartzi, Michaely, and

Thaler in 1997

As stock splits usually entail a substantial cash expenditure, and spreading false

information could lead to undesirable outcomes, they are usually considered a moretrustworthy means for disseminating information than roadshows or press releases.Grinblatt, Masulis, and Titman (1984) also suggest that since competitors cannot accessinformation, management is not accountable for failing to fulfill false promises regardingfuture prospects simply by splitting the company's stock They further emphasize that a

company could gain media and investor attention through a stock split, which could result

in an increase in its stock price This added exposure is believed to enhance the stock'sattractiveness to prospective investors and increase its market value

Conroy and Harris (1999) provide further support for the signaling hypothesis by

demonstrating that excess returns following a stock split are much higher when

shareholders are astonished by a greater-than-anticipated split Additionally, financialanalysts tend to increase their earnings estimates substantially when the split factor ishigher than expected Furthermore, market participants' excess returns tend to besubstantially increased when a company's management proposes a split factor thatresults in the stock price dipping beneath the projected level These findings suggest thatstock splits are not just mere cosmetic changes in a company's stock price, but signal the

company's optimistic expectations for its future performance.

2.2.4 Theoretical basis of abnormal returns in stock trading

2.2.4.1 Theory of Stock Price Volatility

Based on the theory of perfect markets, if the stock market is a perfect market, stock priceswill fluctuate according to the theory of random walks Maurice Kendall's (1953) study

on stock prices in the market resulted in the finding that stock prices always change andcannot be accurately predicted, or it can be said that stock price volatility is a "randomwalk" According to Kendall, stock prices change randomly but still reflect information inthe market This information is reflected through the buying/selling power of investors

in the market With the expectation of price increase, buying power will increase, pushing

up stock prices, and conversely, with fears of price decrease, selling power will increase,pushing down stock prices According to the theory of random walks, all information can

be used to predict the trend of prices, which has already been reflected in the currentstock market price The market price level is a reasonable price, compensating for marketrisk rather than an extraordinary profit margin

According to this theory, the efficiency of stock prices in the stock market depends on

many factors such as macro and micro factors However, many studies have pointed out

that in many countries, the stock market is not efficient This means that stock prices do

not accurately reflect the actual market situation due to the influence of various factors.Stock prices reflect external and internal information of the company Macro informationsuch as inflation, interest rates, as well as internal information such as leadershipmanagement abilities and business performance can all affect the stock price However,misaligned information can lead to erroneous decisions in transactions, and market herd

psychology can also make stock prices not accurately reflect their true value Market

efficiency studies are often used to measure the amount of market noise on stock prices.

According to studies by Morck (2003), Djankov, Qian, Roland, and Zhuravskaya (2006),

an important concept is the correlation of stock price volatility when investors make

buying and selling decisions based on the stock price of another company, not on actual

information, leading to a correlation of stock price volatility of stocks in the same industry

or field According to Fama's study (1970), efficient markets have three formscorresponding to the degree of reflection of past, present, and internal companyinformation In developing countries, stock prices tend to strongly correlate, especially incountries with opaque information environments, weak institutional environments, orlow economic and financial integration In conclusion, the efficiency level of the marketsignificantly impacts the correlation of stock price volatility

2.2.4.2 Abnormal return

Abnormal return is the surplus profit that is greater than what is necessary for a company

to continue its production and business operations that it currently supplies to the

market The abnormal return of a stock can be understood as the difference between actual profit and expected profit of a stock High or low fluctuation in stock prices

compared to expectations may be due to differences in prices before or after an event, orany information Abnormal return can be positive or negative Calculating abnormalreturn will reveal whether the actual profit rate is comparable to the estimated return oninvestment rate of the investment In addition, abnormal return is an important factor inassessing the ability to manage portfolio risk Average abnormal return is the mean value

of abnormal return in the sample studies For example, for the abnormal return of stocksplit announcement events, the average abnormal return will be the average profit of allstock split announcement events This value is calculated separately for each day of theevents Calculating the average abnormal return will indicate whether there is an impact

of the event or announcement on the stock price Therefore, we have the accumulatedaverage abnormal return, which is the sum of all the accumulated average abnormalreturns on each day The accumulated average abnormal return will help evaluate howthe stock price reacts to the event or announcement

Recognizing the potential benefit from abnormal returns, many studies have been

conducted worldwide to identify the factors affecting the volatility of stock profits.Accordingly, Yusmita Kumala, Taufiq & Sa'adah Siddik (2018) studied the impact of

fundamental factors such as the return on assets (ROA), debt-to-equity ratio, and