Reverse Stock Splits in the Biotechnology Industry: An Effectuation Approach


  • Wei Wu
  • Robert Couch
  • Yulianto Suharto
  • Mark J. Ahn is Principal at Pukana Partners and Professor (adjunct) at Portland State University.



biotechnology, effectuation, reverse stock splits, event study, cumulative abnormal returns (CARs), liquidity


Using an effectuation theory lens, we study reverse stock splits in the biotech industry where significant uncertainty makes specific scenarios of success difficult to predict. We conjecture and find that, in contrast to other environments where there is less uncertainty, reverse stock splits in the biotech industry are followed by positive abnormal returns over the subsequent 1- to 12-months. Also consistent with our effectuation-based predictions, we find that these returns are positively related to the reverse split ratio, size, cash holding, and long-term debt, and negatively related to the market-to-book ratio and firm age. We also find that liquidity increases after a reverse stock split. These results suggest that the concept of effectuation theory is better suited to analyzing reverse stock splits in the biotech industry. 

Author Biographies

Wei Wu

is Assistant Professor of Finance at the Atkinson Graduate School of Management at Willamette University

Robert Couch

is Assistant Professor of Finance at the Atkinson Graduate School of Management at Willamette University

Yulianto Suharto

is pharmacist and PhD candidate at Portland State University


Wiltbank R, Read S, Dew N, Sarasvathy SD. Prediction and control under uncertainty: Outcomes in angel investing. Journal of Business Venturing. 2009;24(2):116-33.

Wierenga. DE, Eaton CR. Drug Development and Approval Process (USA): Office of Research and Development- Pharmaceutical Manufacturers Association; 2006 [cited 2009 Dec 17]. Available from:

Ahn MJ, Couch RB, Wu W. Financing Development Stage Biotechnology Companies: RMs vs. IPOs. Journal of health care finance. 2011;38(1):32.

Black BS, Gilson RJ. Venture capital and the structure of capital markets: banks versus stock markets1. Journal of financial economics. 1998;47(3):243-77.

Allen F, Gale D. Diversity of opinion and financing of new technologies. Journal of financial intermediation. 1999;8(1):68-89.

Newton DP, Paxson DA, Widdicks M. Real R&D options1. International Journal of Management Reviews. 2004;5(2):113-30.

Newton DP, Paxson DA, Widdicks M. Real R&D options. International Journal of Management Reviews. 2004;5(2):113-30.

Wiltbank R, Dew N, Read S, Sarasvathy SD. What to do next? The case for nonâ€predictive strategy. Strategic management journal. 2006;27(10):981-98.

Han KC. The effects of reverse splits on the liquidity of the stock. Journal of Financial and Quantitative Analysis. 1995;30(01):159-69.

Mehta C, Yadav SS, Jain P. Managerial motives for stock splits: survey based evidence from India. Journal of Applied Finance. 2011;21(1):103-17.

Sarasvathy SD. Effectuation: Elements of entrepreneurial expertise: Edward Elgar Publishing; 2008.

Brettel M, Mauer R, Engelen A, Küpper D. Corporate effectuation: Entrepreneurial action and its impact on R&D project performance. Journal of Business Venturing. 2012;27(2):167-84.

Augier M, Sarasvathy SD. Integrating evolution, cognition and design: Extending Simonian perspectives to strategic organization. Strategic Organization. 2004;2(2):169-204.

Hitt MA, Duane R. The essence of strategic leadership: Managing human and social capital. Journal of Leadership & Organizational Studies. 2002;9(1):3-14.

Dew N, Sarasvathy SD, Venkataraman S. The economic implications of exaptation. Journal of Evolutionary Economics. 2004;14(1):69-84.

Read S, Dew N, Sarasvathy SD, Song M, Wiltbank R. Marketing under uncertainty: The logic of an effectual approach. Journal of Marketing. 2009;73(3):1-18.

Huggett B, Hodgson J, Lahteenmaki R. Public biotech 2008--the numbers. Nature biotechnology. 2009;27(8):710.

Sarasvathy SD. Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of management Review. 2001;26(2):243-63.

Hemlin S. Creative Knowledge Environments: An Interview Study with Group Members and Group Leaders of University and Industry R&D Groups in Biotechnology. Creativity and Innovation Management. 2009;18(4):278-85.

Ahn MJ, Wu W, Rahman. Medarex: Realizing its Potential? In: Ahn MJ, Alvarez MA, Meyers AD, York AS, editors. Building the Case for Biotechnology: Logos Press; 2010.

Kirchhoff M, Schiereck D. Determinants of M&A Success in the Pharmaceutical and Biotechnological Industry. IUP Journal of Business Strategy. 2011;8(1).

Ahn MJ, Meeks M, Davenport S, Bednarek R. Exploring technology agglomeration patterns for multinational pharmaceutical and biotechnology firms. Journal of Commercial Biotechnology. 2010;16(1):17-32.

Hemphälä J, Magnusson M. Networks for Innovation - But What Networks and What Innovation? Creativity and Innovation Management. 2012;21(1):3-16.

Gulati R, Higgins MC. Which ties matter when? The contingent effects of interorganizational partnerships on IPO success. Strategic Management Journal. 2003;24(2):127-44.

Nicholson S, Danzon PM, McCullough JS. Biotech-pharmaceutical alliances as a signal of asset and firm quality. National Bureau of Economic Research, 2002.

Ford CM, Sharfman MP, Dean JW. Factors Associated with Creative Strategic Decisions. Creativity and Innovation Management. 2008;17(3):171-85.

Angel JJ. Tick size, share prices, and stock splits. The Journal of Finance. 1997;52(2):655-81.

Koski JL. Does volatility decrease after reverse stock splits? Journal of Financial Research. 2007;30(2):217-35.

Wang J. Stock Split Decisions: A Synthesis of Theory and Evidence. Journal of Applied Finance. 2012;22(2).

Desai H, Jain PC. Long-Run Common Stock Returns following Stock Splits and Reverse Splits*. the Journal of Business. 1997;70(3):409-33.

Garcia de Andoain C, Bacon FW, editors. The Impact of Stock Split Announcements on Stock Price: A Test of Market Efficiency. Proceeding of American Society of Business and Behavioral Sciences Annual Conference, Las Vegas; 2009.

Martell TF, Webb GP. The performance of stocks that are reverse split. Review of Quantitative Finance and Accounting. 2008;30(3):253-79.

Woolridge JR, Chambers DR. Reverse splits and shareholder wealth. Financial Management. 1983:5-15.

NASDAQ. Initial Listing Guide 2014 [cited 2014]. Available from:

Rhee SG, Wu F. Anything wrong with breaking a buck? An empirical evaluation of NASDAQ's $1 minimum bid price maintenance criterion. Journal of Financial Markets. 2012;15(2):258-85.

Carhart MM. On persistence in mutual fund performance. The Journal of finance. 1997;52(1):57-82.

Fama EF, French KR. Common risk factors in the returns on stocks and bonds. Journal of financial economics. 1993;33(1):3-56.

Brown SJ, Warner JB. Measuring security price performance. Journal of financial Economics. 1980;8(3):205-58.

Mikkelson WH, Partch MM. Valuation effects of security offerings and the issuance process. Journal of Financial Economics. 1986;15(1):31-60.

Barber BM, Lyon JD. Firm Size, Bookâ€toâ€Market Ratio, and Security Returns: A Holdout Sample of Financial Firms. The Journal of Finance. 1997;52(2):875-83.

Conrad J, Kaul G. Longâ€Term Market Overreaction or Biases in Computed Returns? The Journal of Finance. 1993;48(1):39-63.

Spiess DK, Affleck-Graves J. The long-run performance of stock returns following debt offerings. Journal of Financial Economics. 1999;54(1):45-73.

Chordia T, Huh S-W, Subrahmanyam A. Theory-based illiquidity and asset pricing. Review of Financial Studies. 2009;22(9):3629-68.

Lesmond DA, Ogden JP, Trzcinka CA. A new estimate of transaction costs. Review of Financial Studies. 1999;12(5):1113-41.

Amihud Y, Mendelson H, Lauterbach B. Market microstructure and securities values: Evidence from the Tel Aviv Stock Exchange. Journal of Financial Economics. 1997;45(3):365-90.

Berkman H, Eleswarapu VR. Short-term traders and liquidity: a test using Bombay Stock Exchange data. Journal of financial Economics. 1998;47(3):339-55.