TRADING PATTERNS OF SMALL AND LARGE TRADERS AROUND STOCK SPLIT EX-DATES

We investigate the trading patterns of small and large traders around stock split ex-dates. Using the intraday transaction database for the Toronto Stock Exchange during 1983–89, we find that stock splits are associated with significant changes in trading patterns. Although stock splits appear to have little effect on the trading behavior of large traders (trade value of at least $100,000), they are associated with significant decreases in odd-lot trading and increases in small board-lot trading (trade value of less than $10,000). Although the liquidity premia decrease for all trade sizes, trade direction changes significantly from sell to buy after split ex-dates for all but the large trades, where the change is in the opposite direction. The significant increase in variances after split ex-dates is explained by various microstructure-related variables, and small (large) trades appear to be (de)stabilizing.     

Stock splits to profit insider trading: Lessons from an emerging market

Stock splits have long presented financial puzzles: Why are they undertaken? Why are they associated with abnormal returns? Abnormal returns, particularly those coming shortly before a split’s announcement date, should raise strong suspicions of insider trading, particularly in nations with weak regulatory structures. We examined the 718 split events in the emerging stock market of Vietnam from 2007 through 2011. We found evidence consistent with illegal insider trading, particularly in firms that were vulnerable to insider manipulation and, therefore, more likely to split their stocks. When vulnerable firms’ stocks did split, they provided significant excess short-term returns. Tellingly, the abnormal returns on those stocks prior to the split announcements were also extremely high, indeed higher than their abnormal post-announcement returns. Moreover, trading volume increased prior to the split announcement date. This suspicious pattern is what we would expect if insiders were trading on their knowledge. We propose that illegal insider trading in contexts where it is possible to escape serious penalty provides a previously undiscussed and cogent explanation for both stock splits and abnormal short-term returns.     

FURTHER EVIDENCE ON THE LIQUIDITY EFFECTS OF STOCK SPLITS AND STOCK DIVIDENDS

Currently, there is a limited amount of empirical evidence suggesting that stock splits are associated with a decline in trading liquidity. This evidence directly contrasts with managements' professed intentions for undertaking a split. The evidence to date, however, is of a short-run nature. This study reexamines the liquidity effects of stock splits and stock dividends by assessing both their short- and long-term effects on trading liquidity (i.e., proportional trading volume and percentage bid-ask spreads). The results suggest that stock dividends are associated with decreased proportional trading volume in both the short term and long term, but stock splits are not. The results also indicate that neither stock splits nor stock dividends have an effect on percentage bid-ask spreads.     

Stock Splits and Liquidity: The Case of the Nasdaq-100 Index Tracking Stock

In an attempt to disentangle the signaling effect from the liquidity effect of stock splits, I examine the liquidity changes following the two‐for‐one split of the Nasdaq‐100 Index Tracking Stock. Since there can be no signaling with an index stock split, any difference between pre‐ and postsplit trading may be driven by liquidity but not signaling effects. I find that though the postsplit relative bid‐ask spread is higher and daily turnover is unchanged, the frequency, share volume, and dollar‐volume of small trades all increased after the split, indicating that the split improved liquidity for small trade‐sizes.     

The information content of stock splits

This study examines whether stock splits contain information content about future operating performance or whether splits are undertaken by firms to realign their share prices and to improve trading liquidity. In the four years following split announcements, splitting firms do not experience improved operating performance relative to non-splitting firms. Furthermore, stock split signals are not related to future profitability. The positive announcement effect can be explained by lower share prices and improved market liquidity following stock splits but not by split signals and post-split operating performance. Our results show very little evidence that stock splits signal improvement in long-run operating performance and are more consistent with the trading range/liquidity hypothesis.     

The Market Reaction to Stock Splits

In this paper, a model of market reaction to stock splits is presented and tested. We argue that the announcement of a split sets off the following chain of events. The market recognizes that, subsequent to the (reverse) split ex-day, the daily number of transactions along with the raw volume of shares traded will increase (decrease). This increase in volume results in an increase in the noisiness of the security's return process. The increase in noise raises the tax-option value of the stock, and it is this value that generates the announcement effect of stock splits. Empirical evidence using security returns, daily trading volume, and shareholder data strongly supports this theory. The evidence, in conjunction with this theory, also agrees with extant literature that splits result in decreased liquidity, but there is no evidence that this reduction in liquidity is priced.     

ON ESTIMATING STOCK MARKET VOLATILITY: AN EXPLORATORY APPROACH

Traditional methods of estimating market volatility use daily return observations from a stock index to calculate monthly variance. We break with tradition and estimate stock market volatility using the daily, cross-sectional standard deviation of returns for all firms trading on the New York Stock Exchange and the American Stock Exchange. We find a significantly positive relation between risk and return. Market volatility is estimated to be about half the volatility level previously reported. The intraday, cross-sectional market volatility measure provides findings consistent with risk-return theory.     

Option trading after the opening bell and intraday stock return predictability

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option-to-stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.     

Stock Splits and Stock Dividends: Why,Who, and When

This study investigates empirically why firms split their stock or distribute stock dividends and why the market reacts favorably to these distributions. The findings suggest that stock splits are mainly aimed at restoring stock prices to a “normal range.” Some support can also be found for the oft-mentioned signalling motive of stock splits. Stock dividends are altogether different from stock splits, and they appear to be a decreasing phenomenon. The clue to stock dividend distributions may lie in their perceived substitution for relatively low cash dividends.     

Corporate social responsibility and stock split

This study examines whether socially responsible companies are likely to conduct a stock split. We argue that these companies, compared to their counterparts, could use their strong corporate social responsibility (CSR) performance to reduce information asymmetry with shareholders, and therefore, are less likely to rely on stock splits to signal their future growth potentials. We find empirical evidence to support our hypothesis and investigate the reasons for the lower frequency of stock splits among CSR oriented firms. We find that more socially responsible firms experience a smaller increase in trading volume and a greater increase in bid-ask spread following a stock split than less socially responsible firms. Furthermore, our study finds that, when more socially responsible firms decide to conduct a stock split, they attract a greater proportion of institutional investors with long-term investment horizons.

     

Stock Splits, Tick Size, and Sponsorship

A traditional explanation for stock splits is that they increase the number of small shareholders who own the stock. A possible reason for the increase is that the minimum bid-ask spread is wider after a split and brokers have more incentive to promote a stock. I document a large number of small buy orders following Nasdaq and NYSE/AMEX splits during 1993 to 1994. I also find strong evidence that trading costs increase, and weak evidence that costs of market making decline following splits. This is consistent with splits acting as an incentive to brokers to promote stocks.     

Stock Splits in Switzerland: To Signal or Not to Signal?

In Switzerland, the existence of a mandatory minimum par value inhibited many companies from splitting their stocks as they already traded at their minimum par value. These Swiss companies could split their stocks only after the legal minimum par value was lowered in July 1992 and again in May 2001. These two events provide rare opportunities to distinguish between stock splits that signal a permanent increase in stock price and splits that are merely a reaction to a regulatory change and thus have other motives. The significant return differences between the two samples are in line with the hypothesis that splits are a means to send positive signals to the stock market. Furthermore, while trading volumes remained largely unaffected after stock splits, relative tick sizes generally increased after a stock split, and bid-ask spreads often increased after a stock split.     

The Information Content of Multiple Stock Splits

We examine the relationship between the frequency of stock splits and firms' motives for splitting their stock. Compared to their peers, infrequent splitters show higher post‐split operating performance, but not so for frequent splitters. We find that split ratio and liquidity change explain the stock split announcement effect for the frequent splitters. In contrast, the change in operating performance in the split year explains the announcement effect for the infrequent splitters. Our results suggest that frequent splits are more consistent with the trading range‐improved/liquidity hypothesis and infrequent splits are more consistent with the signaling hypothesis.     

Can splits create market liquidity? Theory and evidence

We present a market microstructure model of stock splits in the presence of minimum tick size rules. The key feature of the model is that discretionary trading is endogenously determined. There exists a tradeoff between adverse selection costs on the one hand and discreteness related costs and opportunity costs of monitoring the market on the other hand. Under certain parameter values, there exists an optimal price. We document an inverse relation between the coefficient of variation of intraday trading volume and the stock price level. This empirical evidence and other existing evidence are consistent with the model.     

The impact of tick size on intraday stock price behavior: evidence from the Taiwan Stock Exchange

This research examines the impact of tick size on intraday stock price behavior for stocks listed on the Taiwan Stock Exchange over the 2-year period of 1998–1999. The sample involves the same 80 firms that trade under the tick size of (New Taiwan Dollars) NT$0.1 and NT$0.5, respectively. The sample firms display a U-shaped intraday pattern of bid–ask spread, volatility, autocorrelation, and trading volume. The empirical results indicate that a larger tick size is associated with a wider bid–ask spread, larger volatility, and more negative autocorrelation. Moreover, a larger tick size is associated with a higher percentage increase of bid–ask spread and volatility in the middle of the trading period. Finally, the effect of tick size on trading volume is insignificant.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.     

Stock splits, trading continuity, and the cost of equity capital

We hypothesize that managers use stock splits to attract more uninformed trading so that market makers can provide liquidity services at lower costs, thereby increasing investors’ trading propensity and improving liquidity. We examine a large sample of stock splits and find that, consistent with our hypothesis, the incidence of no trading decreases and liquidity risk is lower following splits, implying a decline in latent trading costs and a reduced cost of equity capital. Further, split announcement returns are correlated with the improvements in both liquidity levels and liquidity risk. Our analysis suggests nontrivial economic benefits from liquidity improvements, with less liquid firms benefiting more from stock splits.     

Identifying the interaction between stock market returns and trading flows of investor types: Looking into the day using daily data

This paper introduces a new method for identifying the simultaneity between returns and trading flows. The proposed method enables us to identify the intraday interaction using daily data, and provides measures of the information content of trading flows, and their instantaneous response to public information and information revealed by market prices. Applying this method to daily data on investor types from the Korea Stock Exchange, we find significant intraday bi-directional interaction between flows and returns and their latent common drivers, altering some of the results of the previous literature based on Cholesky assumptions. Thus, we obtain a number of new insights concerning the behavior of investor types.     

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.     

WHEN‐ISSUED SHARES,SMALL TRADES,AND THE VARIANCE OF RETURNS AROUND STOCK SPLITS

The increases in volatility after stock splits have long puzzled researchers. The usual suspects of discreteness and bid‐ask spread do not provide a complete explanation. We provide new clues to solve this mystery by examining the trading of when‐issued shares that are available before the split. When‐issued trading permits noise traders to compete with a more homogenous set of traders, decreasing the volatility of the stock before the split. Following the split, these noise traders reunite in one market and volatility increases. Thus, the higher volatility after the ex date of a stock split is a function of the introduction of when‐issued trading, the new lower price level after the split date, and the increased activity of small‐volume traders around a stock split.