ADJUSTMENT OF STOCK PRICES Um as the average and cumulative average residuals for splits followed by "increased"(+) and"decreased"() dividends These definitions of "increased"and"decreased"dividends provide a simple and convenient way of abstracting from general market dividend changes in classifying year-to-year dividend changes for individual securities. The def initions have the following drawback, however. For quarterly dividends an increase in its dividend rate at any time during the nine months before or twelve months after the split can place its stock in the dividend "increased"class. Thus the actual increase need not have oc- curred in the year after the split. The same fuzziness, of course also arises in classifying dividend"decreases. " We shall see later, however that this fuzziness fortunately does not obscure the differences between the aggregate behavior patterns of the two grou b. Empirical results. The most important empirical results of this study are summarized in Tables 2 and 3 and Figures 2 and 3. Table 2 presents the average residuals, cumulative average residuals, and the sample size for each f the two dividend classifications ("increased, and"decreased")and for the total of all splits for each of the sixty months surrounding the split. Figure phs of ge residuals for the total sample of splits and Figure 3 presents these graphs for each of the two dividend classifications. Table 3 shows the number of splits each year along with the end of June level of the stock price index. Several of our earlier statements can now be substantiated. First, Figure Ba, 3a and 3b show that the average residuals(um) in the twenty-nine months prior to the split are uniformly positive for all splits and for both classes of dividend behavior. This can hardly be attributed entirely to the splitting process. In a random sample of fifty-two splits from our data the median time between the announcement date and the effective date of the split was 44.5 days. Similarly, in a random sample of one hundred splits that occurred etween 1/1/1946 and 1/1/1957 Jaffe [9 found that the median time between announcement date and effective date was sixty-nine days. For both samples in only about 10 per cent of the cases is the time between announcement date and effective date greater than four months. Thus it seems safe to say that the split cannot account for the behavior of the regression residuals as far as two and one-half years in advance of the split date Rather we sug gest the obvious-a sharp improvement, relative to the market, in the earn- ings prospects of the company sometime during the years immediately pre- ceding a split Thus we conclude that companies tend to split their shares during "ab- normally"good times-that is during periods of time when the prices of their shares have increased much more than would be implied by the normal In the remainder of the paper we shall always use“ Increase”and“ decrease”as defined in the text. That is, signs of dividend changes for individual securities are measured relative to changes in the dividends for all N Y S.E. common stocksADJUSTMENT OF STOCK PRICES 9 U; as the average and cumulative average residuals for splits followed by "increased" (+) and "decreased" (-) dividends. These definitions of "increased" and "decreased" dividends provide a simple and convenient way of abstracting from general market dividend changes in classifying year-to-year dividend changes for individual securities. The def￾initions have the following drawback, however. For a company paying quarterly dividends an increase in its dividend rate at any time during the nine months before or twelve months after the split can place its stock in the dividend "increased" class. Thus the actual increase need not have oc￾curred in the year after the split. The same fuzziness, of course, also arises in classifying dividend "decreases." We shall see later, however, that this fuzziness fortunately does not obscure the differences between the aggregate behavior patterns of the two groups. b. Empirical Results. The most important empirical results of this study are summarized in Tables 2 and 3 and Figures 2 and 3. Table 2 presents the average residuals, cumulative average residuals, and the sample size for each of the two dividend classifications ("increased," and "decreased") and for the total of all splits for each of the sixty months surrounding the split. Figure 2 presents graphs of the average and cumulative average residuals for the total sample of splits and Figure 3 presents these graphs for each of the two dividend classifications. Table 3 shows the number of splits each year along with the end of June level of the stock price index. Several of our earlier statements can now be substantiated. First, Figures 2a, 3a and 3b show that the average residuals (u,,) in the twenty-nine months prior to the split are uniformly positive for all splits and for both classes of dividend behavior. This can hardly be attributed entirely to the splitting process. In a random sample of fifty-two splits from our data the median time between the announcement date and the effective date of the split was 44.5 days. Similarly, in a random sample of one hundred splits that occurred between 1/1/1946 and 1/1/1957 Jaffe [9] found that the median time between announcement date and effective date was sixty-nine days. For both samples in only about 10 per cent of the cases is the time between announcement date and effective date greater than four months. Thus it seems safe to say that the split cannot account for the behavior of the regression residuals as far as two and one-half years in advance of the split date. Rather we sug￾gest the obvious-a sharp improvement, relative to the market, in the earn￾ings prospects of the company sometime during the years immediately pre￾ceding a split. Thus we conclude that companies tend to split their shares during "ab￾normally" good times-that is during periods of time when the prices of their shares have increased much more than would be implied by the normal In the remainder of the paper we shall always use "increase" and "decrease" as defined in the text. That is, signs of dividend changes for individual securities are measured relative to changes in the dividends for all N.Y.S.E. common stocks