So why do they do it? Conventional wisdom holds that companies split their stocks after reaching a threshold price so that they are priced low enough for individual investors to buy. Once a stock price shoots higher than $100, for instance, evidence suggests that individuals tend to back off from buying because they are hard pressed to come up with the $10,000 or more needed to buy in round lots of at least 100 shares.

For years, university finance professors have repeatedly reported in research papers that splits are a neutral event for stocks -- neither positive nor negative -- even though shares regularly rally after a split announcement.

However, research published in 1996 by some Arizona professors suggests that splits signal positive information to investors, and that the initial jump in prices actually underestimates the good news. In a paper published in the Journal of Finance, these professors showed that stocks that split performed eight percentage points better than the mean of all stocks in the first year after the effective date of the split. After three years, the split stocks' returns were 16 percentage points better than the mean, they reported.

The explanation: Companies that split their stocks have typically enjoyed a big run-up in share prices, and the split announcement is a heads-up to investors that the board expects the good times to keep on rolling. After all, a soundly managed company that believes its stock is overvalued after a run-up isn’t likely to announce a split because it expects the price to slip back on its own.

In another research paper published in 1996, a group of San Diego researchers reported a simple way to produce above-average returns with splits: On the last day of the month, buy all stocks that split 2-for-1 or 3-for-2 in that month, and hold them for three months. The strategy returned, on average, annualized gains of 32.3% from 1975 to 1995, compared with annualized gains of 17.6% for a benchmark group of 3,300 other stocks.

Of course, this strategy works only if a small subset of investors follows it. If investors in general buy stocks announcing splits, the increase in demand will drive the stock price up to the point where there is no excess return left.

Most finance professors continue to believe that there is no "exploitable anomaly" in companies that split their stocks. To learn more about the effect of splits on your stock, go to Historical Charts in Stock Research, click in Options, check the box to show Splits, and look at what has happened to your stock after each split in the past.