Abstract
In a study of 1,131 stock splits spanning the period 1983–1989 we observe an increase in the number of trades as well as a reduction in the mean trade size following the split. Combined with earlier reported findings of an increase in the number of shareholders postsplit, we conclude that the number of liquidity traders increases after a split. We confirm the previously observed increase in the bid-ask spread following a split, and upon decomposition of the spread find an increase in its adverse selection component in the postsplit period. This is consistent with the finding by Brennan and Hughes (1991) of an increase in the number of analysts following a stock after a split. Further, observing a decrease in market depth following a split we determine that Kyle-type models incorporating diverse private information for informed traders most correctly describe the nature of security trading. Since this decrease in postsplit market depth is not related to the trading volume or the split factor, we reject price correction explanations for stock splits.
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Ferris, S.P., Hwang, CY. & Sarin, A. A microstructure examination of trading activity following stock splits. Rev Quant Finan Acc 5, 27–41 (1995). https://doi.org/10.1007/BF01074850
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DOI: https://doi.org/10.1007/BF01074850