<![CDATA[Stock splits have long been a puzzling corporate phenomenon. A split is a cosmetics corporate event, yet it is reacted by the market. Two competing theories have emerged in the finance literature as the explanations of stock splits. According to signaling theory, managers declare stock splits to convey favorable private information about the value of the firm. According to trading range theory, stock split is a means to realign per-share prices to preferred price range, so that the price is not overpriced.This paper intents to describe the stock splits phenomenon and to examine whether the signaling theory and the trading range theory are valid to explain stock splits phenomenon. Independent t-test to compare means is used to test whether the performance and share price of the splitting firms differ from nonsplitting firms. Forty-one listed companies in the basic and chemial industry of The Jakarta Stock Exchange (JSX) are selected as the unit of analysis. Paired t-test to compare means is used to test whether the fifty-four firms of The JSX which splitting their shares during July 1996-June 1997 period have net income increasing experiences prior to stock splitting.The results of the study indicate that the splitting firms do not differ from the nonsplitting firms in term of performance as measured by net income nor by earnings per share. This is not consistent with the signaling theory. The splitting firms differ from the nonsplitting in term of share price as measured by price to book value, but not by price to earnings. This is consistent with the trading range theory. The splitting firms have net income increasing experiences during the three years prior to stock splitting.]]>
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