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The Market Reaction to Stock Splits

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  • Lamoureux, Christopher G
  • Poon, Percy
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    Abstract

    In this paper, a model of market reaction to stock splits is presented and tested. The auth ors argue that the announcement of a split sets off the following cha in of events: the market recognizes that subsequent to the (reverse) split ex-day, the daily number of transactions along with the raw vol ume of shares traded will increase (decrease); this increase in volum e results in an increase in the noisiness of the security's return pr ocess; 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. Copyright 1987 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 42 (1987)
    Issue (Month): 5 (December)
    Pages: 1347-70

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    Handle: RePEc:bla:jfinan:v:42:y:1987:i:5:p:1347-70

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