Every price series you’ve ever backtested embeds an adjustment policy — decisions about splits, dividends, spinoffs, and mergers — usually made by a vendor, usually undocumented, and usually discovered during a reconciliation that won’t tie out. This guide is the mechanics: what each action does to a naive series, and the architecture that keeps you in control.
The mechanics of adjustment
A 2-for-1 split halves the price overnight; unadjusted, that’s a −50% “return.” Adjustment multiplies all earlier prices by the split factor so the series is return-continuous. Two properties follow that everyone eventually relearns: adjustment rewrites history (every new action changes all past adjusted prices — an adjusted series is a current-vintage object, knowledge-timed like any other fact), and adjusted prices are relative, not absolute (a 1990s adjusted price of $0.43 never traded — price-level logic like “stocks under $5” run on adjusted data is a filter on the future).
Dividends: the total-return distinction
Split-adjustment is uncontroversial; dividends fork the road. Price-only adjusted series (most free and many paid feeds — check which you have) show the price drop on ex-date as a loss: a long-only equity backtest understates returns by roughly the dividend yield, compounded — 2%/yr for decades is not a rounding error. Total-return adjustment reinvests dividends into the factor. Neither is wrong; unstated is wrong, and strategy-dependent: dividend-capture and value-factor research need the components separated, short positions owe the dividends (a short-leg cost price-adjusted series hide), and cross-vendor reconciliation fails whenever two policies meet.
The actions that break pipelines
- Spinoffs: holder receives shares of a new entity; the parent gaps down. Price-only series book a loss; total-return handling needs the spinoff’s value — and the new entity needs an identity in your universe from the distribution date. The classic silent P&L hole.
- Mergers (cash/stock/mixed): positions convert to cash, acquirer shares, or both; naive pipelines see a delisting and drop the terminal value — turning M&A premia into losses. Stock-for-stock needs share-ratio conversion, not price splicing.
- Delistings: the final return (often severely negative for cause, positive for buyouts) must reach the P&L; the delisting-return conventions are half of survivorship hygiene.
- Rights issues, special dividends, return-of-capital: each a different factor computation; vendors disagree, and the disagreements cluster in exactly the small caps where factors live.
- Ticker reuse and identity churn: actions rename and recycle tickers; joins on ticker splice unrelated companies — entity ids or archaeology, choose one.
The architecture: store unadjusted + actions, adjust at read
The standing principle: keep unadjusted prices and a corporate-actions table (action type, ex-date, terms, knowledge time), compute adjustment factors at query time, per policy. What it buys: auditability (a factor you computed is checkable; a vendor’s baked-in one is faith), policy freedom (price-only, total-return, and component views from one store), vintage correctness (adjusted history as-of any date), and cross-vendor reconciliation (compare actions, not entangled outputs). Cost: one well-tested adjustment module — which is exactly the kind of code the known-answer test pattern was made for: a synthetic security with one of every action type, hand-computed truth, machine-precision assertion.
Common failure modes in the wild
- The 2%/yr phantom drag: price-only data mistaken for total-return — we hit exactly this question auditing a leveraged-ETF study, where confirming “no dividends” was a required step before attributing drag to costs.
- Backtest-live divergence on ex-dates: research on adjusted series, production on raw feeds; every ex-date books a fake signal or fake P&L until reconciliation catches it.
- Vendor factor revisions: adjustment factors change (corrections, late reports); pinned snapshots plus your own factors-from-actions is the defense.
- Split-driven “volatility”: unadjusted data with unhandled splits injects ±50% returns into vol estimates and risk models — the loudest version of the quietest problem.
Questions to ask (of a vendor or a paper)
- Price-only or total-return — and where is the policy documented?
- Are actions available as data, or only baked into prices?
- How were spinoffs, mergers, and delisting proceeds handled?
- Do price-level filters run on unadjusted values?
What our scoring captures
Adjustment-policy disclosure is a small text signal with outsized rigor information: papers stating their dividend handling and delisting conventions almost always got the bigger things right too. Its absence in a long-horizon equity result is a quiet flag — the ten-minute read’s data section is where to catch it.
The identity layer: PIT architecture → · The bias family: survivorship → · The vendor question: market-data guide →