Changes in Trading Activity Following Stock Splits and Their Effect on Volatility and the Adverse Information Component of the Bid-Ask Spread

We examine changes in trading activity around stock splits and their effect on volatility and the adverse-information component of the bid-ask spread. Even after controlling for microstructure biases, we find a significant increase in volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse-information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.

[1]  D. Murray.  FURTHER EVIDENCE ON THE LIQUIDITY EFFECTS OF STOCK SPLITS AND STOCK DIVIDENDS , 1985 .

[2]  H. Baker,et al.  Management's View of Stock Splits , 1980 .

[3]  A. Craig MacKinlay,et al.  Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test , 1988 .

[4]  Hans R. Stoll,et al.  Inferring the Components of the Bid‐Ask Spread: Theory and Empirical Tests , 1989 .

[5]  Charles M. Jones,et al.  Transactions, Volume, and Volatility , 1994 .

[6]  Gary Gottlieb,et al.  Implications of the Discreteness of Observed Stock Prices , 1985 .

[7]  M. Nimalendran,et al.  Price reversals : Bid-ask errors or market overreaction? , 1990 .

[8]  James A. Ohlson,et al.  Volatility increases subsequent to stock splits: An empirical aberration , 1985 .

[9]  K. French,et al.  Stock return variances: The arrival of information and the reaction of traders , 1986 .

[10]  Christopher G. Lamoureux,et al.  The Market Reaction to Stock Splits , 1987 .

[11]  Anat R. Admati,et al.  A Theory of Intraday Patterns: Volume and Price Variability , 1988 .

[12]  T. Copeland.  Liquidity Changes Following Stock Splits , 1979 .

[13]  G. E. Powell,et al.  Why Companies Issue Stock Splits , 1992 .

[14]  David A. Dubofsky.  Volatility increases Subsequent to NYSE and AMEX Stock Splits , 1991 .

[15]  R. Roll,et al.  A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market , 2008 .

[16]  A. Lo,et al.  Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test , 1987 .

[17]  C. Ball,et al.  Estimation Bias Induced by Discrete Security Prices , 1988 .

[18]  P. Elgers,et al.  FINANCIAL CHARACTERISTICS RELATED TO MANAGEMENTS'STOCK SPLIT AND STOCK DIVIDEND DECISIONS , 1985 .

[19]  Baruch Lev,et al.  Stock Splits and Stock Dividends: Why, Who, and When , 1987 .

[20]  Ananth Madhavan,et al.  A Bayesian model of intraday specialist pricing , 1991 .

[21]  M. Maloney,et al.  The Effects of Splitting on the Ex: A Microstructure Reconciliation , 1992 .

[22]  Duane J. Seppi,et al.  Common Factors in Prices, Order Flows and Liquidity , 1998 .

[23]  M. Nimalendran,et al.  Market Evidence on the Opaqueness of Banking Firms' Assets , 2001 .

[24]  Jonathan M. Karpoff.  The Relation between Price Changes and Trading Volume: A Survey , 1987, Journal of Financial and Quantitative Analysis.

[25]  Y. Amihud,et al.  Asset pricing and the bid-ask spread , 1986 .

[26]  Avanidhar Subrahmanyam,et al.  Liquidity Effects of the Introduction of the S&P 500 Index Futures Contract on the Underlying Stocks , 1993 .

[27]  A. Dravid.  A Note on the Behavior of Stock Returns around Ex‐Dates of Stock Distributions , 1987 .

[28]  P. J. Hughes,et al.  Stock Prices and the Supply of Information , 1991 .

[29]  Thomas J. George,et al.  Estimation of the Bid-Ask Spread and Its Components: A New Approach , 1991 .