Stock Splits, Broker Promotion, and Decimalization

Abstract

Stock split ex-dates are associated with both an increased intensity of small investor buying and a positive abnormal return. The broker promotion hypothesis suggests that the increase in relative spread after a split induces brokers to promote splitting stocks to small investors. The trading inconvenience hypothesis ascribes the ex-split effects to inconveniences such as investors' aversion to dealing with due bills, which is unrelated to relative spreads. The reduction in the bid-ask spread due to decimalization allows us to disentangle these two hypotheses. During the 1/8th pricing period, we show that after the ex-date, the relative spread increases significantly. The average buy order size decreases and the frequency of small transactions increases after the split. After decimalization, these changes are smaller in magnitude. We observe significant positive abnormal returns around the ex-date during the 1/8th pricing period, but not in the decimal pricing period. These results support the broker promotion hypothesis.

The information content of stock splits

“…They argue that stock splits may be designed only to improve the marketability of split stocks either because the post-split price meets certain investor specific preferences (see Lakonishok and Lev, 1987;Dyl and Elliott, 2006 for the trading range hypothesis), or because splits provide other market participants such as market makers with more incentives to promote the stocks (see Angel, 1997;and Schultz, 2000 for the optimal tick size hypothesis; and Kadapakkam et al, 2005 for broker promotion hypothesis). Studying splits that are clearly devoid of any information, researchers find support for the non-information or marketability explanation (see Fernando et al, 1999;and Rozeff, 1998 for mutual fund splits; and Muscarella and Vetsuypens, 1996 for American Depository Receipt (ADR) solo-splits).…”

Stock split size, signaling and earnings management: Evidence from the Spanish market

“…This is achieved by reducing the price to a level that balances: on the one hand, the reduced transaction costs for small investors through trading in round lots, and on the other, the increased transaction costs given by lower prices, in terms of brokerage commissions and relative bid-ask spreads (Copeland, 1979). This hypothesis is empirically supported by a series of studies which find: an increase in the number of shareholders (Lamoureux & Poon, 1987), more trading by small uninformed investors (Kadapakkam, Krishnamurthy, & Tse, 2005), and an increase in the relative bid-ask spread (Conroy, Harris, & Benet, 1990). In opposition is the fall in trading volume detected by Copeland (1979) and Lamoureux & Poon (1987), among others.…”

The impact of stock split handling rules on returns: Evidence from Canada

“…Past studies such as Conrad and Conroy (1994), Easley, O'Hara, and Saar (2001), and Kadapakkam, Krishnamurthy, and Tse (2005) have found evidence that stock split handling rules have signifi cant impacts on stock returns in the days surrounding US stock splits. The purpose of this study is to examine whether stock split handling rules in a non-US setting also have signifi cant impacts on stock prices.…”