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Stock Splits, Broker Promotion, and Decimalization

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  • Kadapakkam, Palani-Rajan
  • Krishnamurthy, Srinivasan
  • Tse, Yiuman

Abstract

Stock split ex-dates are associated with both an increased intensity of small investor buying and a positive abnormal return. The broker promotion hypothesis suggests that the increase in relative spread after a split induces brokers to promote splitting stocks to small investors. The trading inconvenience hypothesis ascribes the ex-split effects to inconveniences such as investors' aversion to dealing with due bills, which is unrelated to relative spreads. The reduction in the bid-ask spread due to decimalization allows us to disentangle these two hypotheses. During the 1/8th pricing period, we show that after the ex-date, the relative spread increases significantly. The average buy order size decreases and the frequency of small transactions increases after the split. After decimalization, these changes are smaller in magnitude. We observe significant positive abnormal returns around the ex-date during the 1/8th pricing period, but not in the decimal pricing period. These results support the broker promotion hypothesis.

Suggested Citation

  • Kadapakkam, Palani-Rajan & Krishnamurthy, Srinivasan & Tse, Yiuman, 2005. "Stock Splits, Broker Promotion, and Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 873-895, December.
  • Handle: RePEc:cup:jfinqa:v:40:y:2005:i:04:p:873-895_00
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    Cited by:

    1. Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2010. "Institutional Ownership, Analyst Following and Share Prices," Working Papers 10-07, University of Pennsylvania, Wharton School, Weiss Center.
    2. Pia Bandyopadhyay & James Hackard & Yiuman Tse, 2010. "The effect of stock splits on iShare exchange-traded funds," Managerial Finance, Emerald Group Publishing, vol. 36(2), pages 134-159, January.
    3. Perez, M. Fabricio & Shkilko, Andriy & Sokolov, Konstantin, 2015. "Factor models for binary financial data," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 177-188.
    4. 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.
    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. Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2012. "Institutional ownership, analyst following, and share prices," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2175-2189.
    7. Chen, Chun-nan & Wu, Chunchi, 2009. "Small trades and volatility increases after stock splits," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 592-610, October.
    8. Chitru S. Fernando & Vladimir A. Gatchev & Paul A. Spindt, 2013. "IPO offer price selection, institutional subscription, and the value of the firm: theory and evidence," Chapters,in: Handbook of Research on IPOs, chapter 5, pages 101-123 Edward Elgar Publishing.
    9. Gow-Cheng Huang & Kartono Liano & Ming-Shiun Pan, 2011. "REIT Stock Splits and Liquidity Changes," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 527-547, November.
    10. Lin, Ji-Chai & Singh, Ajai K. & Yu, Wen, 2009. "Stock splits, trading continuity, and the cost of equity capital," Journal of Financial Economics, Elsevier, vol. 93(3), pages 474-489, September.
    11. Gow-Cheng Huang & Kartono Liano & Ming-Shiun Pan, 2015. "The effects of stock splits on stock liquidity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(1), pages 119-135, January.

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