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The information content of stock split announcements: Do options matter?

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  • Chern, Keh-Yiing
  • Tandon, Kishore
  • Yu, Susana
  • Webb, Gwendolyn
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    Abstract

    We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 6 (June)
    Pages: 930-946

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:6:p:930-946

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    Web page: http://www.elsevier.com/locate/jbf

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    Cited by:
    1. Chang, Chuang-Chang & Hsieh, Pei-Fang & Wang, Yaw-Huei, 2010. "Information content of options trading volume for future volatility: Evidence from the Taiwan options market," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 174-183, January.
    2. Alejandro Bernales & Massimo Guidolin, 2013. "The Effects of Information Asymmetries on the Success of Stock Option Listings," Working Papers 484, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Arisoy, Yakup Eser, 2010. "Volatility risk and the value premium: Evidence from the French stock market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 975-983, May.
    4. Chang, Chuang-Chang & Hsieh, Pei-Fang & Lai, Hung-Neng, 2009. "Do informed option investors predict stock returns? Evidence from the Taiwan stock exchange," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 757-764, April.
    5. Chen, Honghui & Nguyen, Hoang Huy & Singal, Vijay, 2011. "The information content of stock splits," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2454-2467, September.
    6. Al-Yahyaee, Khamis H. & Pham, Toan M. & Walter, Terry S., 2011. "The information content of cash dividend announcements in a unique environment," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 606-612, March.
    7. Yagüe, José & Gómez-Sala, J. Carlos & Poveda-Fuentes, Francisco, 2009. "Stock split size, signaling and earnings management: Evidence from the Spanish market," Global Finance Journal, Elsevier, vol. 20(1), pages 31-47.
    8. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
    9. Jordan, Dan J. & Rice, Douglas & Sanchez, Jacques & Wort, Donald H., 2011. "Explaining bank market-to-book ratios: Evidence from 2006 to 2009," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2047-2055, August.
    10. Martijn Cremers & Joost Driessen & Pascal Maenhout & David Weinbaum, 2004. "Individual Stock-Option Prices and Credit Spreads," Yale School of Management Working Papers amz2391, Yale School of Management, revised 01 Jan 2005.
    11. Niels C. Thygesen & Robert N. McCauley & Guonan Ma & William R. White & Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae & Ernest Gnan & Morten Balling & Paul , 2013. "50 Years of Money and Finance: Lessons and Challenges," SUERF 50th Anniversary Volume - 50 Years of Money and Finance: Lessons and Challenges, SUERF - The European Money and Finance Forum, number 1 edited by Morten Balling & Ernest Gnan.

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