September 24, 2012 An Examination of the Survivability of Reverse Stock Splits: If they lose value, then why do Companies continue to perform Reverse Splits? ABSTRACT The recent financial crisis precipitated a number of reverse stock splits by distressed companies such as American International Group (AIG) and Citigroup. Generally, reverse splits are tools for company recapitalizations that attempt to resurrect poorly performing common stock, maintain exchange listings, or enhance liquidity. Many companies fail shortly after a reverse split, but others survive. Adapting the Hensler, Rutherford, and Springer (1997) IPO proportional survival model to 1,215 reverse splits during the 1995 to 2011 period, we are the first study to examine the survivability of reverse split companies. We observe that survivability varies for reverse split companies based on firm size, pre-split operating performance, market volatility, and pre-split stock price performance. We also find a relation between ex-date returns and survivability. JEL classification: G32, G34 Keywords: Stock splits, reverse stock splits, survival, survivability An Examination of the Survivability of Reverse Stock Splits: If they lose value, then why do Companies continue to perform Reverse Splits? 1. Introduction The recent financial crisis precipitated a number of reverse stock splits for distressed companies such as American International Group (AIG) and Citigroup. Generally, reverse stock splits are tools for company recapitalization that increase the stock price in an attempt to resurrect poorly performing common stock, maintain exchange listings, or enhance liquidity. Many companies fail shortly after a reverse split, but others survive. This raises two questions: How long do reverse split companies remain viable? What factors are associated with survival? Adapting the Hensler, Rutherford, and Springer (1997) accelerated failure time model to 1,237 reverse splits during the 1995 to 2011 period, we are, to the best of our knowledge, the first study to examine the survivability of reverse split companies. A reverse stock split, some times called a share consolidation, is an exchange of old shares for a lesser number of new shares. Prices of reverse split stocks increase proportionally. Factors affecting the survival of reverse split companies include firm size, operating performance, market volatility, and stock price performance. As documented in previous studies (e.g., Martell and Webb), we find that reverse-splits are generally undertaken by small, Nasdaq-listed, low-priced stocks. In addition, we find that these reverse-splitting firms are often unprofitable and that many of them are technology companies. 2. Background Peterson and Peterson (1992) report that there are several motives behind the decision to undertake a reverse stock split. These include increasing marketability by listing (or continuing to list) on an 1 exchange or the NASDAQ, allowing companies to maintain prices of $2 to be eligible under Fed Regulation T margin requirements; and significantly reducing the number of shareholders to reduce servicing costs or enable the company to go private. Woolridge and Chambers (1983) find that due to information effects stock prices of reverse split firms decline significantly on the proposal, approval, and effective dates; that trading considerations may cause declines on effective dates; that reverse splits are unanticipated by the market and are not preceded by adverse stock price movement within six weeks; that stock prices continue to decline for a brief period after the effective date; that relative earnings performance influences shareholder returns on the proposal, approval, and effective dates, with better (poorer) performing firms obtaining smaller (larger) absolute negative returns on all three dates; if the proposal or approval news is not published in the financial press or company SEC filings, this information is not quickly included in the security price. Lamoureux and Poon (1987) find that reverse split announcement negative abnormal returns result in increased volatility and increased liquidity. Also, Han (1995) shows enhanced liquidity with decreases in bid-ask spreads and increases in trading volumes after reverse splits. Peterson and Peterson (1992) report that discretionary reverse splits include those used to reduce shareholder servicing costs, increase earnings per share, improve marketability (allow for margin trading or voluntarily increase share price to list on an exchange), or to recapitalize (except for Chapter 11. Given that non-discretionary reverse splits are coerced, these reverse splits are implemented to satisfy a price per share listing requirement or Chapter 11 creditors. They find that discretionary reverse splits incur negative announcement effects, but that non-discretionary reverse 2 splits generate positive announcement returns. Also, they opine that returns vary for decisions by informed parties such as management returns and for those by uninformed parties such as exchanges. Desai and Jain (1997) examine initial and long-term returns for forward and reverse stock splits for the period from 1976 to1991. While they find positive announcement period returns around forward stock splits, they observe negative announcement period returns for reverse stock splits. Also, they report one-year and three-year post-split announcement returns of 7.05% and 11.87%, respectively, for forward splits and -10.76% and -33.90%, respectively, for reverse splits.In a similar vein, Kim, Klein, and Rosenfeld (2008) examine long-term returns of 1,612 reverse stock splits over a 40-year period from 1962 to 2001 and find statistically significant negative excess returns and poor operating performance over the three-year period following the ex-split month. Given the generally low survival rates and short survival times of firms following reverse stock splits, we adapt the Cox proportional hazards model. Lane, Looney, and Wansley (1986); Hensler, Rutherford, and Springer (1997); and Adjei, Cyree, and Walker (2008) use this model for bank failures, for IPO survival, and for survival of reverse mergers and IPOs, respectively. They note that hazard methodology is appropriate to determine the length of time a company remains viable before being delisted or dropped by exchanges for negative reasons such as bankruptcy of failure to meet listing requirements. 3. Sample selection and data 3.1. Sample selection procedure Using Center for Research in Security Prices (CRSP) distribution code 5523 with negative share factors, we identify our initial sample of 1394 reverse splits from 1995 to 2011. We eliminate 11 closed end funds with SIC 6726 and 44 REITs or master limited partnerships (SIC three-digit code 3 679). Following Peterson and Peterson (1992) we eliminate 79 companies with confounding events such as concurrent IPOs, concurrent forward splits, going private transactions, or the second of duplicate share classes. Also, we follow Kim, Klein, and Rosenfeld (2008) and delete 42 companies with split factors less than 1:2. Such companies have negligible stock price reactions (Byun and Rozeff; 2003). This reduces the sample to 1,215 observations.1 Each observation must have a news article or SEC filing to validate the reverse split announcement and completion. We cross check all events with Lexis-Nexis, the Investment Dealer’s Digest, Mergent Industrial Manual (formerly Moody’s) and the Dow Jones News Service. We obtain operating data including book values of equity and debt from Research Insight (Compustat) and Mergent. SEC filings and news articles provide additional information for the sample. We obtain announcements or filings for 1215 companies, our final sample. We obtain stock returns, stock price, and market capitalization data from CRSP. Similar to Kim, Klein, and Rosenfeld (2008), we compare market-adjusted returns to CRSP equal-weighted index results (including distributions) during the sample period. This avoids the small company bias noted by Barber and Lyon (1997) and Loughran and Ritter (2000). 3.2 Variables We examine several variables from the reverse stock split and survivability literature. We report only the variables that make a significant contribution to our reverse split survivability logit model.2 To ensure that our results are not heavily influenced by outliers, we winsorize the survival period, the 1 After a search of SEC filings, Dow Jones News Service, Lexis Nexis, Newspaper data bases, S&P and Mergent Dividend Records we could not confirm a reverse split for two companies. 2 In addition to the variables reported we examined….. 4 trading period, total assets, and return on assets by setting the values of each variable below the first percentile and above the ninety-ninth percentile equal to the value at the first and ninety-ninth percentile, respectively. 3.2.1 Log of total assets Following Hensler, Rutherford and Springer (1997), we use the log of total assets for the year before the reverse split as a proxy for size. Consistent with Schultz (1993) who finds that the probability of a company delisting is inversely related to offering size, we anticipate that survivability varies with company size 3.2.2 Trading period We calculate the trading period as the number of weeks between the IPO date and the reverse split announcement date. Similar to the Hensler, Rutherford, and Springer (1997) study for IPOs, we expect that the longer the trading period for reverse stock splits, the greater the chance of survivability.3 3.2.3. Recent operating performance We measure operating performance as the return on assets (ROA) for the year before the reverse stock split. Consistent with Kim, Klein, and Rosenfeld (2008) who observe that reverse split firms with poor operating performance have weak stock performance, we expect that survivability varies with ROA. 3 For the four companies that conduct reverse splits before the IPO date, we report a trading period of zero. 5 3.2.4. Market volatility Market forces such as volatility tend to influence security prices. We use the CBOE Volatility Index® (VIX®) which measures market expectations of near-term volatility using S&P 500 stock index option prices. The value of the VIX® on the ex-date, which reflects the annualized expected movement in the market over the next 30 days, is used as a proxy for market volatility. We anticipate that survivability will vary inversely with market volatility. 3.2.5. Run-up Consistent with Peterson and Peterson (1992) who find that run up is inversely related with returns, we use annualized company weekly returns for the six months before the reverse split to indicate runup. We expect that survivability varies with run up. 3.2.6 Discretionary versus non-discretionary motive Kim, Klein, and Rosenfeld (2008) observe that only reverse splits with an ex-split price of $5 or less have significant negative abnormal returns. Thus, we segregate our model into two segments: greater than $5 ex-split price and $5 or less ex-split price to examine the price impact on survivability. Firms are required to maintain a minimum stock price of at least $1 on the NYSE and Nasdaq, firms that have pre-split prices less than $1 are essentially forced to undertake the reverse split in order to maintain their listing. Firms that have post-split prices greater than $5 reflect a desire for investment by corporate investors and increased liquidity. 3.3. Logit model We adapt the Adjei, Cyree, and Walker (2008) logit model to test whether a reverse split will fail in bankruptcy or delisting for negative reasons or will survive as a continuing company or be acquired 6 by another company. We define our logit model as: Yi = a0 + a1lnTA + a2TPi + a3 ROA(t-1)i + a4VIX + a5Runup + ei (1) where Yi =1 if the reverse split survives (CRSP delisting code 100) and 0 if it ceases to exist (all other CRSP delisting codes); lnTA is the natural logarithm of total assets of firm i, TP is the trading period in months from the IPO to the reverse split announcement), ROA is the return on assets of firm i for the fiscal year prior to the reverse split announcement), VIX is the S&P options volatility index, and Run-up is the return from the IPO to the announcement of the reverse stock split. Also we apply equation (1) to delisting reverse splits where Yi = 1 if the firm ceases to exist for positive reasons (CRSP delisting codes from 200 to 399) or goes private (code 573) and 0 if the firm ceases to exist for negative reasons such as bankruptcy or failure to meet exchange listing standards (CRSP delisting codes of 500-572 and 574-599).4 3.4. Survival model We apply the Cox (1972) hazard technique to estimate the survivability of reverse stock splits. Cox’s model assumes that for any two firms, the ratio of their likelihood of failure is constant over time. The hazard function is used to determine the probability that a firm will experience an event within a particular time period. We use the length of time from reverse split to delisting as a proxy for survival time. Censored firms 4 We exclude CRSP delisting codes 231, 241, and 331 from the acquired set if the company acquires another firm or restructures its shares and continues with another PERMNO. We then use the delisting code for the company’s final PERMNO. 7 survive for an unknown period beyond the sample period. The hazard probability is the conditional probability that a reverse split announced at t=0 is delisted at time t given that it has not been delisted before time t. The hazard probability is shown by: π(π‘;πΏ) π»(π‘; πΏ) = (1−πΉ(π‘;πΏ)) (2) . where t is the number of months the reverse split firm has been listed, F(t) is the probability that a reverse split firm has been delisted prior to time t and f(t) is the probability density function on t. Hensler, Rutherford, and Springer (1997) show that since the probability of delisting is duration dependent, the duration data are right-censored, that the log-logistic model best approximates the distribution of the duration data. Thus, our log-logistic baseline hazard model is H0 (t) =ο ο¬ο²ο¨ο¬tο ο©ο²οο±ο―ο¨ο±ο«ο ο¨ο¬tο©ο²ο©ο ο¨3) where ο¬= eXB and ο² = ο±ο―ο³ and t is the failure time. X is a vector of independent variables known to affect the survival period and B is a vector of model parameters. We use the variables and parameters from the results of equation 1 as the vector model (eXB). The standard deviation of the right censored duration t is ο³. The log-logistic function decreases monotonically if ο²<ο±ο¬ο but increases monotonically if ο²ο >1. According to Hensler, Rutherford, and Springer (1997), the most likely failure time occurs at: π‘= 1 (π−1) ⁄π π (4) Because some observations continue trading at the end of the sample period, the failure of these observations is unobserved. Those firms that continue to trade through the end of the sample period are censored. Failure time models can be estimated by including or excluding the censored observations; however, the estimates derived when censored data are included are generally more 8 reliable. Therefore, we include an additional dummy variable, δ, in the model to denote those observations that are censored. Under these conditions, the general form of the likelihood function is: 1−πΏπ πΏ = π ∏ππ=1 ππ (π‘π ; πΏπ )πΏπ (1 − πΉπ (π‘π ; πΏπ )) (5) where ππ (π‘π ; πΏπ ) and 1 − πΉπ (π‘π ; πΏπ ) are as defined in equation (2) and c is a constant. 3.5. Returns We calculate announcement period returns as the cumulative abnormal returns for the three day period centered on the announcement date.5 Woolridge and Chambers (1983) and Peterson and Peterson (1992) observe negative abnormal reverse split announcement returns. Thus, we expect survivability to vary with announcement returns. Ex-date returns are holding period abnormal returns from the day prior closing to the reverse split exdate close. Han (1995) and Kim, Klein, and Rosenfeld (2008) observe negative abnormal ex-date and long-term returns. We anticipate that survivability varies with ex-date returns. 3.6. Robustness checks We conduct several robustness checks. Next we examine survivability by share factor: 1:2, 1:3, 1:4, 1:5, and 1:10. Thereafter, we contrast results for reverse split survivors and failures, and multiple versus single reverse splits. We anticipate that companies with multiple reverse splits will survive longer than those with single reverse splits. Similar to Ritter (1991) and Hensler, Rutherford, and Springer (1997) who find increased survivability for IPOs in the drug, airline, or financial industries, we examine survivability by industry (two digit SIC code)6 . We expect that reverse stock split 5 For those 177 companies with announcements reported on or after the reverse split date, we use the reverse split date as the announcement date. 6 CITE observes that Research Insight SIC codes are more accurate than CRSP SIC. 9 survivability varies with IPO survivability. As an additional check we apply a dummy variable, AN, where 1 = the reverse split is announced after or on the ex-date and 0 otherwise. 4. Results 4.1 Descriptive statistics Panel A of Table 1 reports descriptive statistics for the final sample of 1,215 reverse split firms. For our sample, only 28.9% of firms survive through 2011, the end of the sample period. The mean (median) survival period is 44.9 (25.9) months. Therefore, half these firms survive for approximately two years or less following the reverse split. The total assets variable is extremely right-skewed with a mean (median) of $1.9 billion ($38.4 million). The largest firm in our sample, AIG Inc., has total assets of $860.4 billion at the time of its reverse split. Reverse split stocks exhibit a mean (median) trading period (months listed prior to the split) of 111.7 (88.0) months with a range from about two weeks (0.5 month) to about 84 years (1,012.9 months). The return on assets (ROA) variable is leftskewed with a mean (median) value of -64.0% (-22.4%). Clearly, reverse splitting firms are generally not profitable. In addition, some extreme values are observed with a minimum ROA of -7508.7% and maximum ROA of 168.5%. The CBOE volatility index (VIX) has a mean (median) value of 22.6% (21.5%) and ranges from 9.9% to 80.9%. The pre-split stock price run-up has a mean (median) of -2.1% (-1.8%) with a range of -47.8% to 9.4%. Consistent with previous studies, the mean (median) unadjusted announcement date returns are -2.9% (-3.0%) while the mean (median) unadjusted ex-date returns are -6.6% (-5.5%). Panel B of Table 1 shows the distribution of split factors for the sample of reverse splits. The most common choices are the 1 for 10 split chosen by 244 firms or 20% of the sample and the 1 for 5 split chosen by 231 firms or 19% of the sample. Split factors of 1:4 and 1:3 are also quite common with 10 175 and 138 sample firms or 14% and 11% of the sample, respectively, choosing these split factors. Taken together, these four reverse split factors comprise almost two-thirds of the sample. Panel C of Table 1 reports the distribution of sample firms by industry. Following Loughran and Ritter (2004), we include 325 firms, or about 27% of the sample, in the Technology industry.7 After creating the Technology classification, we sort the remaining firms into industry groups based on 2-digit SIC codes. The second largest grouping is Chemicals & Allied Products Manufacturers with 129 firms, or over 10% of the sample in this industry. Since the focus of this study is on survivability of reverse-splitting firms, Table 2 compares the surviving firms (Panels A and C) with the non-surviving firms (Panels B and D) in terms of the variables of interest. The surviving firms have a lower mean (median) survival period than the nonsurviving firms. Given that the surviving firms are censored, i.e., the figures shown represent minimum survival times for these firms, it is hard to draw strong conclusions from the comparison of survival periods. However, comparison across the other variables may allow us to identify the characteristics that distinguish surviving firms from non-surviving firms. Specifically, surviving firms appear to be much larger, somewhat older, and more profitable (i.e., less unprofitable) than nonsurviving firms. In addition, non-surviving firms exhibit lower returns in the six months prior to the split announcement. As documented in previous studies, announcement date and ex-date mean (and median) returns are negative for both surviving and non-surviving reverse split firms. Lastly, while announcement date returns appear to be similar for surviving and non-surviving firms, the ex-date 7 The four-digit SIC codes 3571, 3572, 3575, 3577, 3578, 3661, 3663, 3669, 3671, 3672, 3674, 3675, 3677, 3678, 3679, 3812, 3823, 3825, 3826, 3827, 3829, 3841, 3845, 4812, 4813, 4899, 7371, 7372, 7373, 7374, 7375, 7378, and 7379 are designated as Technology firms. 11 returns are much more negative for non-surviving firms. Table 3 reports the results of our logit model. The dependent variable is a dummy variable that equals 1 if the firm still trades at the end of the sample period and 0 otherwise. Model 1 includes each of the previously discussed explanatory variables. Model 2 includes the same explanatory variables plus 17 industry dummy variables. The estimated coefficient on firm size as measured by the natural logarithm of total assets is significantly positive, suggesting that large firms are more likely to survive following a reverse stock split than small firms. We find no significant relation between the survival and profitability as measured by ROA. Perhaps these firms are all doing so poorly in terms of profitability that the degree of losses has little effect on survival. Somewhat surprisingly, market volatility is positively related to survival. Therefore, reverse-splitting firms are generally more likely to survive when expected market volatility is high. One possible explanation is that the survival of these firms has an option-like quality which makes them more likely to survive if the market turns up and the market volatility variable is capturing this upside potential. Pre-split market returns are positively related to survival, suggesting that firms that have relatively better stock price performance prior to the split, are more likely to survive following the split. Ex-date returns are also positively related to survival, suggesting that the market is able to forecast to some extent which firms will survive. As shown in Table 3, the results in Model 2 for the non-industry variables are both qualitatively and quantitatively similar to those from Model 1. However, a number of the industry dummy variables are also significant at the 10% level or better. We find that survival is more likely for reverse splitting firms in the following industries: oil & gas, chemicals manufacturing, electronic & electrical equipment manufacturing, measuring & analyzing equipment manufacturing, communications, 12 depository financial institutions, and doctors, hospitals & nursing homes. Table 4 presents the maximum likelihood results for the log-logistic AFT models of post-split duration. As in Table 3, Model 1 includes only the quantitative explanatory variables and Model 2 uses the same quantitative variables plus the industry dummy variables. As predicted, size is positively associated with survival time. In addition, more profitable firms (or at least less unprofitable firms) survive longer following a reverse split. Interestingly, market volatility is not significant in explaining post-split survival time. However, the six-month pre-split market return is positively associated with survival time, suggesting firms that do relatively well prior to the split survive for a longer period. The ex-date returns are positively associated with survival time, suggesting that the market is able to predict to some extent the ex-post survival time of reversesplitting firms. When the industry dummy variables are added in Model 2, the results are qualitatively similar. The estimated coefficient on ROA increases in significance. Firms in the oil & gas, chemicals manufacturing, and doctors, hospitals & nursing homes industries tend to have longer survival times while firms in the mining and movies, amusement & recreation industries tend to have shorter survival times after controlling for the other explanatory factors. 5. Conclusions and implications We document low survival rates and short survival periods for most firms that undertake a reverse stock split. Consistent with other studies, we find that mean returns are negative for reverse stock split announcements. We also find negative returns around the ex-date. Our main contribution is documenting the relationship between survivability and firm characteristics. We find a positive 13 relation between survival and firm size, market volatility, pre-split stock price performance, and exdate returns. We also document a positive relation between survival time and firm size, pre-split operating performance, pre-split stock price performance, and ex-date returns. 14 References Adjei, F., K.B. Cyree, and M.M. Walker, 2008, The determinants and survival of reverse mergers vs IPOs, Journal of Economics and Finance, 32, 176-194. Barber, B.M. and J.D. Lyon, 1997, Detecting long-run abnormal stock returns: The empirical power and specification of test statistics, Journal of Financial Economics, 43, 341-372. Byun, J. and M. Rozeff, 2003, Long-run performance after stock splits: 1927-1996, Journal of Finance, 58, 1063-1086. Cox, D.R. 1972, Regression models and life tables (with discussion), Journal of the Royal Statistical Society, Series B 34, 187-220. Desai, H. and P.C. Jain, 1997, Long-run common stock returns following stock splits and reverse splits, Journal of Business, 70:3, 409-433. Han, K.C., 1995, The effects of reverse splits on the liquidity of the stock, Journal of Financial and Quantitative Analysis, 30:1, 159-169. Hensler, D.A., R.C. Rutherford, and T.M. Springer, 1997, The survival of initial public offerings in the aftermarket, Journal of Financial Research, 20:1, 93-110. Kim, S., A.J. Klein, A. and, J. Rosenfeld, 2008, Return performance surrounding reverse stock splits: Can investors profit?, Financial Management 37:2, 173-192. Lamoureux, C.G. and P. Poon, 1987, The market reaction to stock splits, Journal of Finance, 42, 13471370. Lane, W.R, S.W. Looney, and J.W. Wansley, 1986, An application of the Cox proportional hazards model to bank failure, Journal of Banking and Finance, 10:4, 511-532. Loughran, T. and J.R. Ritter, 2000, Uniformly least powerful tests of market efficiency, Journal of Financial Economics, 51, 361-389. Loughran, T. and J.R. Ritter, 2004, Why has IPO underpricing changed over time?, Financial Management, 33:3, 5-37. Martell, Terrence F. and Gwendolyn P. Webb, 2008, The performance of stocks that are reverse split, Review of Quantitative Finance and Accounting, 30, 253-279. Peterson, D.R., and P.P. Peterson, 1992, A further understanding of stock distributions: The case of reverse stock splits, Journal of Financial Research, 15:3, 189-205. Ritter, J.R., 1991, The long-run performance of initial public offerings, Journal of Finance, 46, 3-27. Schultz, P., 1993, Unit initial public offerings, Journal of Financial Economics, 34, 199-229. Shumway, T., 2001, Forecasting bankruptcy more accurately: A simple hazard model, Journal of Business, 74:1, 101-124. Woolridge, J.R. and D.R. Chambers, 1983, Reverse splits and shareholder wealth, Financial Management, 12, 5-15. 15 Table 1: Descriptive statistics for reverse split firms Statistics in Panel A are reported prior to winsorization of values below (above) the 1st (99th) percentile. Panel A: Statistics for full sample (N=1,215) Mean Median Survival dummy (%) 28.9 Survival period (months) 44.9 Total assets ($ millions) 1,890.8 Months listed prior to split 111.7 Return on assets (%) -64.0 CBOE volatility index (%) 22.6 Pre-split 6-month run-up (%) -2.1 Announcement date returns (%) -2.9 Ex-date returns -6.6 Panel B: Sample distribution by split factor Split factor 1 for 10 1 for 5 1 for 4 1 for 3 1 for 6 1 for 2 1 for 8 1 for 20 Panel C: Sample distribution by industry SIC code (Industry description) * 28 73 61-67 52-59 13 50-51 35 36 (Technology) (Chemicals & allied products mfrs.) (Business services) (Financial institutions – non-depository) (Retail trade) (Oil & gas extraction) (Wholesale trade) (Industrial & commercial machine mfrs.) (Electrical & electronic equipment) 0.0 25.9 38.4 88.0 -22.4 21.5 -1.8 -3.0 -5.5 # of firms 244 231 175 138 71 67 53 48 # of firms 325 129 84 72 68 61 52 37 36 Minimum 0.0 0.3 0.1 0.5 -7508.7 9.9 -47.8 -77.3 -78.2 Maximum Std Dev 1.0 206.4 860,418.0 1,012.9 168.5 80.9 9.4 359.5 175.4 45.3 46.7 26,790.0 99.2 278.0 8.2 2.9 21.6 19.3 # of firms 39 39 15 15 12 9 60 1,215 Split factor 1 for 7 1 for 15 2 for 5 1 for 12 1 for 25 1 for 50 All other split factors Total firms SIC code (Industry description) 60 80 87 10-12 38 78-79 49 48 (Financial institutions - depository) (Doctors, hospitals, nursing homes) (Engineering, accounting & mgt svcs.) (Metal & coal mining) (Measuring & analyzing equipment mfrs.) (Movies & amusement and recreation svcs.) (Utilities) (Communications) Firms in industries with fewer than 10 obs. Total firms *Following Loughran and Ritter (2004), SIC codes 3571, 3572, 3575, 3577, 3578, 3661, 3663, 3669, 3671, 3672, 3674, 3675, 3677, 3678, 3679, 3812, 3823, 3825, 3826, 3827, 3829, 3841, 3845, 4812, 4813, 4899, 7371, 7372, 7373, 7374, 7375, 7378, and 7379 are categorized as Technology firms. Other classifications are based solely on 2-digit SIC codes after excluding those companies classified as Technology firms. 16 # of firms 36 31 28 26 26 26 17 14 147 1,215 Table 2: Comparison of surviving firms with non-surviving firms Panels A and B report unwinsorized statistics for the full sample while Panels C and D report statistics for the full sample after winsorization of values below (above) the 1st (99th) percentile. Panel A: Surviving firms (N = 351) Mean Survival period (months) Total assets ($ millions) Months listed prior to split Return on assets (%) CBOE volatility index (%) Pre-split 6-month run-up (%) Announcement date returns (%) Ex-date returns Panel B: Non-surviving firms (N = 864) Median 38.3 5,532.5 124.8 -40.9 23.4 -1.4 -2.9 -1.9 Mean 20.8 66.0 95.9 -12.9 21.9 -1.2 -2.7 -1.6 Median Survival period (months) 47.6 Total assets ($ millions) 411.4 Months listed prior to split 106.3 Return on assets (%) -73.3 CBOE volatility index (%) 22.3 Pre-split 6-month run-up (%) -2.4 Announcement date returns (%) -2.9 Ex-date returns -8.4 Panel C: Surviving firms (N = 351) – Winsorized variables Mean 29.7 32.6 84.0 -27.5 21.3 -2.1 -3.4 -7.3 Median Survival period (months) 38.3 20.8 Total assets ($ millions) 1,229.1 66.0 Months listed prior to split 120.9 95.9 Return on assets (%) -40.0 -12.9 Panel D: Non-surviving firms (N = 864) – Winsorized variables Mean Survival period (months) Total assets ($ millions) Months listed prior to split Return on assets (%) 47.6 332.8 105.2 -57.8 Median 29.7 32.6 84.0 -27.5 Minimum 0.3 2.6 1.0 -920.1 10.2 -47.8 -50.5 -42.2 Minimum 0.4 0.1 0.5 -7,508.7 9.9 -14.6 -77.3 -78.2 Minimum 0.8 2.6 8.5 -571.8 Minimum 0.8 1.5 8.5 -571.8 Maximum 200.6 860,418.0 930.7 35.7 79.1 6.3 67.5 122.2 Maximum 206.4 75,501.6 1,012.9 168.5 80.9 9.4 359.5 175.4 Maximum 195.4 19,489.5 461.4 20.8 Maximum 195.4 19,489.5 461.4 20.8 Std Dev 43.9 49,468.4 115.9 86.4 8.9 3.3 12.4 15.7 Std Dev 47.6 3,092.4 91.0 324.6 8.0 2.7 24.3 20.2 Std Dev 43.8 3,659.4 97.4 77.8 Std Dev 47.3 1,659.3 83.1 96.0 17 Table 3: Results for logit model of the post-split survival of reverse splitting firms Variable Intercept Size – Ln(Total assets) Operating perf. - Return on assets Market volatility - VIX Pre-split market return Ex-date return Model 1 -2.0324*** (0.2473) 0.2508*** (0.0362) -0.0510 (0.0854) 1.6763** (0.7963) 12.4746*** (2.8581) 1.5265*** (0.3781) Technology Mining - SIC 10 & 12 Oil & gas - SIC 13 Chemicals manufacturers - SIC 28 Industrial & commercial machinery - SIC 35 Electronic & electrical equipt mfrs - SIC 36 Measuring & analyzing equipt mfrs - SIC 38 Communications - SIC 48 Utilities - SIC 49 Wholesale trade - SIC 50-51 Retail trade - SIC 52-59 Financials - depository institutions - SIC 60 Financials - non-depository - SIC 61-67 Business services - SIC 73 Movies & amusement and recreation - SIC 78-79 Doctors, hospitals & nursing homes - SIC 80 Engineering, accounting & mgt services - SIC 87 Model 2 -2.4065*** (0.3336) 0.2605*** (0.0399) 0.0005 (0.0902) 1.8711** (0.8213) 12.1296*** (2.9595) 1.4977*** (0.3892) 0.1814 (0.2404) -0.5400 (0.6338) 0.7549** (0.3400) 1.1258*** (0.2808) 0.5534 (0.4278) 0.7419* (0.4226) 0.8094* (0.4887) 1.0283* (0.6166) -0.2095 (0.6766) -0.4952 (0.4570) -0.3671 (0.3964) 1.0263*** (0.4217) -0.3312 (0.3611) 0.4035 (0.3195) -1.4388 (0.8948) 0.9489** (0.4292) 0.4674 (0.4790) ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively. 18 Table 4: Maximum likelihood results for log-logistic accelerated failure time model of the post-split duration of reverse splitting firms Variable Intercept Size – Ln(Total assets) Operating perf. - Return on assets Market volatility - VIX Pre-split market return Ex-date return Model 1 3.8292*** (0.1423) 0.0826*** (0.0236) 0.1112** (0.0461) -0.0017 (0.5096) 15.0488*** (1.6273) 1.2151*** (0.2317) Technology Mining - SIC 10 & 12 Oil & gas - SIC 13 Chemicals manufacturers - SIC 28 Industrial & commercial machinery - SIC 35 Electronic & electrical equipt mfrs - SIC 36 Measuring & analyzing equipt mfrs - SIC 38 Communications - SIC 48 Utilities - SIC 49 Wholesale trade - SIC 50-51 Retail trade - SIC 52-59 Financials - depository institutions - SIC 60 Financials - non-depository - SIC 61-67 Business services - SIC 73 Movies & amusement and recreation - SIC 78-79 Doctors, hospitals & nursing homes - SIC 80 Engineering, accounting & mgt services - SIC 87 Model 2 3.5733*** (0.1891) 0.0753*** (0.0237) 0.1310*** (0.0457) 0.0418 (0.5023) 13.2283*** (1.5885) 1.1418*** (0.2282) 0.1357 (0.1379) -0.4487* (0.2719) 0.3827* (0.2164) 0.4404*** (0.1730) 0.1043 (0.2569) -0.0536 (0.2609) 0.2985 (0.3013) 0.4402 (0.4651) 0.1541 (0.3489) -0.1472 (0.2182) -0.2317 (0.1990) 0.5080 (0.3243) -0.1357 (0.1985) -0.0894 (0.1877) -0.5523** (0.2590) 0.6440** (0.2898) 0.1525 (0.2755) ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively. 19