A Note on the Behavior of Stock Returns around Ex‐Dates of Stock Distributions

stock returns after the ex-split date is significantly higher than the presplit volatility. The increase in the standard deviation of daily returns is of the order of twenty-eight to thirty-five percent and persists for as long as a full year after the ex-date.' Even more interesting is their finding that there is no (permanent) change in the variance of returns at the announcement date. They investigate several potential explanations for this "aberration" but are unable to find a satisfactory answer. Grinblatt, Masulis, and Titman [6] (henceforth GMT) examine the behavior of expected returns around announcement dates and exdates for stock distributions exceeding ten percent. Classifying stock distributions as either stock dividends (split factors of twenty-five percent or less) or stock splits, they conclude that return behavior differs across these two types of distributions, with stock dividends exhibiting larger abnormal returns than splits. This is interpreted by them as evidence in favor of the "retained earnings hypothesis": the dissimilar accounting treatment of these two types of stock distributions affects retained earnings in different ways, and hence splits are not simply large stock dividends. This paper extends the work of OP to all types of stock distributions. In Section I, postsplit variance is shown to be different from the presplit variance for small stock splits and stock dividends. While small splits display an increase in volatility like large splits, stock dividends are associated with a decrease in the volatility of returns. This evidence also supports GMT's conclusions that stock splits and stock dividends are "different" types of events. Section II investigates the volatility of returns for reverse splits and demonstrates that postsplit volatility decreases for these events. This evidence is complementary to Woolridge and Chambers' [9] findings that reverse splits are also associated with negative abnormal returns at their announcement and ex-dates. Section III concludes the paper.