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When-Issued Shares, Small Trades, And The Variance Of Returns Around Stock Splits

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Author Info
James J. Angel
Raymond M. Brooks
Prem G. Mathew
Abstract

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. 2004 The Southern Finance Association and the Southwestern Finance Association.

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Article provided by Southern Finance Association and Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 27 (2004)
Issue (Month): 3 ()
Pages: 415-433
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Handle: RePEc:bla:jfnres:v:27:y:2004:i:3:p:415-433

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  1. Renneboog, L.D.R. & Spaenjers, C., 2008. "The Dutch Grey Market," Discussion Paper 2008-88, Tilburg University, Center for Economic Research. [Downloadable!]
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