ADJUSTMENT OF STOCK PRICES assessment of the firms long-run earning and dividend paying potential. We suggest, then, that unusually high returns on splitting shares in the months immediately preceding a split reflect the market's anticipation of substantial increases in dividends which, in fact, usually occur. Indeed evidence presented below leads us to conclude that when the information effects of dividend changes are taken into account, the apparent price effects of the split will vanish. 5 3. SAMPLE AND METHODOLOGY a. The data. We define a"stock split"as an exchange of shares in whicl at least five shares are distributed for every four formerly outstanding. Th this definition of splits includes all stock dividends of 25 per cent or greater. e also decided, arbitrarily that in order to get reliable estimates of the parameters that will be used in the analysis, it is necessary to have at least twenty-four successive months of price-dividend data around the split date. Since the data cover only common stocks listed on the New York Stock Exchange, our rules require that to qualify for inclusion in the tests a syso security must be listed on the Exchange for at least twelve months before and twelve months after the split. From January, 1927, through December 1959, 940 splits meeting these criteria occurred on the New York Stock Exchange. b. Adjusting security returns for general market conditions. Of course, during this 88 year period, economic and hence general stock market condi- tions were far from static. Since we are interested in isolating whatever ordinary effects a split and its associated dividend history may have on returns, it is necessary to abstract from general market conditions in examining the returns on securities during months surrounding split dates. We do this in the following way: Define Pit= price of the j-th stock at end of month t. P;t= Pit adjusted for capital changes in month t+l. For the method of Dit= cash dividends on the j-th security during month t(where the divi- dend ' is taken as of the ex-dividend data rather than the payment Rit=(Pit+ Di)/Pi t-1= price relative of the j-th security for month t L t= the link relative of Fisher,s"Combination Investment Performance Index"[6,(table AI)]. It will suffice here to note that L is a com- dividend changes, There is in our evidence which suggests that from information effects, in a perfect capital market dividend policy will ne the total market value of a firm The basic dat contained in the master file of monthly prices, dividends, and eapital changes, collected and maintained by the center for Research in (Graduate School of Business, University of Chicago). At the time conducted, the file covered the period January, 1926 to Decembe description of the data see Fisher and Lorie [7