Stock Splits, A Survey

Yildizhan, Celim (2006): Stock Splits, A Survey.

Abstract

In this survey paper I summarize the literature's findings on the short-run and long-run effects of stock split announcements as well as what happens in the preceding and subsequent years around a stock split event. I also summarize how firm characteristics influence these results. Furthermore, I discuss the various theories regarding why splits occur and why stock return distributions change subsequent to split events. I specifically focus on the changes in the first and second moments of stock returns and analyze related theories such as optimal trading, optimal tick size, liquidity, and signaling. More importantly I present the pros and cons of each of these theories and discuss which of them are more plausible. I suggest that a combination of the several theories suggested in the literature can rationally explain the return distribution changes around stock splits. I conclude with suggestions for future research.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock split, stock splits, split ex-date, split announcement, optimal tick size, clientele changes, survey on stock splits, Celim Yildizhan
• Subjects: G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

References

Amihud, Y., and H. Mendelson, (1987): ―Trading Mechanisms and Stock Returns: An Empirical Investigation,‖ Journal of Finance, 42, 533–553

Anderson, T.G., and T. Bollerslev, (1998): ―Answering the Skeptics: Yes, Standard Volatility Models do Provide Accurate Forecasts,‖ International Economic Review 39, 885–905

Asquith, P., Healey, P. and Palepu, K, (1989): ―Earnings and stock splits,‖ Accounting Review, 44, 387–403

Angel, James J., (1997): ―Tick Size, Share Prices, and Stock Splits,‖ Journal of Finance, Vol. 52 No 2, 655-681

Arnold, Tom M., Marc L. Lipson, (1997): ―Tick Size and Limit Order Execution: An Examination of Stock Splits,‖ Working Paper

Blume, M.E., and R.F. Stambaugh, (1983): ―Biases in Computed Returns: An Application to the Size Effect,‖ Journal of Financial Economics, 12, 387–404

Boehme, Rodney D. and Bartley R. Danielsen, (2004): ―Stock Split Post-Announcement Returns: Underreaction or Market Friction?‖ Working Paper

Brailsford, T.J. (1996): ‗The empirical relationship between trading volume, returns and volatility,‘ Accounting and Finance, vol. 36, pp. 89–111

Brennan, M.J. and T.E. Copeland, (1988a): ―Stock splits, stock prices and transaction costs,‖ Journal of Financial Economics 22, 83-101

Brennan, Michael J., and Patricia Hughes, (1991): ―Stock prices and the supply of information,‖ Journal of Finance 46, 1665-92

Byun, Jinho and Michael S. Rozeff, (2003): ―Long-run performance after stock splits: 1927 to 1996,‖ Journal of Finance 58, 1063-1085

Carhart, M., (1997): ―On persistence in mutual fund performance,‖ Journal of Finance 52, 57-82

Conroy, Robert M., Robert S. Harris, and Bruce A. Benet, (1990): ―The effects of stock splits on bid-ask spreads,‖ Journal of Finance 45, 1285-95

Conroy, Robert M., Robert S. Harris, (1999): ―Stock Splits and Information: The Role of Share Price,‖ Financial Management, Autumn 1999 Edition

Copeland, T.E., (1979): ―Liquidity Changes Following Splits,‖ Journal of Finance 34, 115-141 43

Desai, Hemang and Prem Jain, (1997): ―Long-run common stock returns following stock splits and reverse splits,‖ Journal of Business 70, 409-433

Desai, Anand S, M Nimalendran, and S Venkataraman, (1998): ―Changes in Trading Activity Following Stock Splits and Their Effect on Volatility and the Adverse- Information Component of the Bid-Ask Spread,‖ Journal of Financial Research 21,159-83

Dhatt, M. Y. H. Kim and S. Mukherji, (1997): ―Did the 1986 Tax Reform Act Affect Market Reactions to Stock Splits?: A Test of the Tax-Option Hypothesis,‖ The Financial Review, 1997 vol. 32, issue 2, pages 249-71

Dravid, A.R, (1987): ―A Note on the Behavior of Stock Returns Around Ex-Dates of Stock Distributions,‖ Journal of Finance, 42, 163–168.

Dubofsky, D., (1991): ―Volatility Increases Subject to NYSE and AMEX Stock Splits,‖ Journal of Finance, 46, 421–432

Fama, Eugene F., (1998): ―Market efficiency, long-term returns, and behavioral finance,‖ Journal of Financial Economics 49, 283-306

Fama. E., L. Fisher, M. Jensen and R. Roll, (1969): ―The adjustment of stock prices to new information,‖ International Economic Review IO, l-21

George, Thomas J., Gautam Kaul, and M.Nimalendran, (1991): ―Estimation of the bid-ask spread and its components: a new approach,‖ Review of Financial Studies 4, 623-656

Gottlieb. G. and A. Kalay, (1983): ―Implications of the discreteness of observed stock prices,‖ Unpublished manuscript, Graduate School of Business Administration, New York University, New York, NY

Gray, Stephen, Tom Smith and Robert Whaley, (1996): ―Stock Splits: Implications for models of the bid-ask spread,‖ Journal of Empirical Finance 10 (2003) 271-303

Grinblatt, M., R. Masulis and S. Titman, (1985): ―The Valuation Effects of Stock Splits and Stock Dividends,‖ Journal of Financial Economics, 13, 461–490

Harris, Lawrence, (1994): ―Minimum price variations, discrete bid-ask spreads and quotation sizes,‖ Review of Financial Studies 7, 149-178

Harris, Lawrence, (1994b): ―Optimal dynamic order submission strategies in some stylized trading problems,‖ University of Southern California working paper

Ikenberry, David, Graeme Rankine, and Earl Stice, (1996): ―What do stock splits really signal?‖ Journal of Financial and Quantitative Analysis 31, 357-377

Ikenberry, David and Sundaresh Ramnath, (2002): Underreaction to self-selected news events: the case of stock splits,‖ Review of Financial Studies 15, 489-526

Julio, B. and Q. Deng, first written November (2005): ―The Informational Content of Implied Volatility Around Stock Splits,‖ SSRN

Kaul G., C. Jones, M. Lipson, (1994a): ―Transactions, volume, and volatility,‖ Review of Financial Studies, 1994, 7:631-651

Kaul G., C. Jones, M. Lipson, (1994b): ‖Information, Trading and Volatility,‖ Journal of Financial Economics 36, 127-154

Koski, J.L., (1998): ―Measurement Effects and the Variance of Returns After Stock Splits and Stock Dividends,‖ Review of Financial Studies, 11, 142–162

Klein, L.S., and D.R. Peterson, (1988): Investor Expectations of Volatility Increases Around Large Stock Splits as Implied in Call Option Premia,‖ Journal of Financial Research, 11, 71–80

Lakonishok, J. and T. Vermaelen, (1986): ―Tax-induced trading around ex-dividend days,‖ Journal of Financial Economics 16. 287-319

Lakonishok, Josef and Baruch Lev, (1987): ―Stock Splits and stock dividends: Why, who and when,‖ Journal of Finance 42, 913-932

Lamoureux, Christopher G. and Percy Poon, (1987): ―The market reaction to stock splits,‖ Journal of Finance 42, 1347-1370

Lamoureux, C.G. & Lastrapes, W.D. (1990): Heteroscedasticity in stock return data: Volume vs. GARCH effects,‖ Journal of Finance, vol. 45, pp. 221–29

Lipson, Mark, S. Mortal, December (2005): ―The Effect of Stock Splits on Clientele: Is Tick Size Relevant?‖ SSRN

Maloney, M. T. and Mulherin, J. H., (1992): ―The effects of splitting on the ex: A microstructure reconciliation,‖ Financial Management, 21, 44–59

McNichols, M. and A. Dravid, (1990): "Stock dividends, stock splits and signaling," Journal of Finance 45, 857-79

Mitchell, Mark L., and Erik Stafford, (1998): ―Managerial decisions and long-term stock price performance,‖ Unpublished working paper, University of Chicago School of Business

Peterson, David R., and Pamela P. Peterson, (1992): ―A further understanding of stock distributions: The case of reverse stock splits,‖ Journal of Financial Research, 15, 189-205

Poteshman, A., (2000): ―Forecasting Future Volatility from Option Prices,‖ Working paper, University of Illinois at Urbana-Champaign

Powell, Gary E. and H. Kent Baker, (1993): ―The effects of stock splits on the ownership mix of a firm,‖ Review of Financial Economics v3.n1

Reboredo, Juan C., (2003): ―How is the market reaction to stock splits?‖ Applied Financial Economics, 13, 361–368

Rozeff, Michael S., (1998): "Stock Splits: Evidence from Mutual Funds," Journal of Finance 53, February, 335–349

Schultz, Paul, (2000): ―Stock Splits, Tick Size, and Sponsorship,‖ Journal of Finance 55,429-50

Sheikh, A.M., (1989): ―Stock Splits, Volatility Increases, and Implied Volatilities,‖ Journal of Finance, 44, 1361–1372

Stoll, Hans R., (1989): ―Inferring the components of the bid-ask spread: Theory and empirical tests,‖ Journal of Finance 44, 115-134

Walsh D.M., (1998): ―Evidence of Price Change Volatility Induced by the Number and Proportion of Orders of a Given Size,‖ Australian Journal of Management, Vol. 23

Woolridge, J.R., and Chambers, D.R. (1983): ―Reverse splits and shareholder wealth,‖ Financial Management Autumn: 5-15