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The effect of stock splits on iShare exchange-traded funds

Listed author(s):
  • Pia Bandyopadhyay
Registered author(s):

    Purpose - The purpose of this paper is to examine the pre- and post-split behavior for trades and quotes of iShare exchange-traded funds (ETFs) that split in June 2005. The objective is to determine whether post-split changes in the bid-ask spread, trade turnover, average dollar-size trade, frequency of small trades, trade price location, and order imbalance support either or both of the two widely examined hypotheses for the motivation for share splits. Design/methodology/approach - The impact of the iShares split around the split date was studied, using the measures above to examine the support, if any, for each of two hypotheses, broker promotion and/or the trading inconvenience, with regard to the sample and time period under study. Findings - Bid-ask spread, average dollar order size, and frequency of small trades were found to fail to reject the broker-promotion hypothesis, while the increase in post-split turnover fails to reject the trading-inconvenience hypothesis. Changes in the trade-price-location parameter and in order imbalance fail to support either hypothesis. Practical implications - Because of the importance of basket securities in the determination of the prices for listed securities, issuers of these securities, investors and regulators should be interested whether the price behavior of splitting iShares is similar to that experienced in other securities. Originality/value - Numerous studies in the literature have investigated the effects of stock splits on individual securities, but it is believed, none has yet appeared studying the recent splits in iShares.

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    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 2 (January)
    Pages: 134-159

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:2:p:134-159
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    1. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
    2. Raymond M. Brooks & Ajay Patel & Tie Su, 2003. "How the Equity Market Responds to Unanticipated Events," The Journal of Business, University of Chicago Press, vol. 76(1), pages 109-134, January.
    3. Michael S. Rozeff, 1998. "Stock Splits: Evidence from Mutual Funds," Journal of Finance, American Finance Association, vol. 53(1), pages 335-349, 02.
    4. Dubofsky, David A, 1991. " Volatility Increases Subsequent to NYSE and AMEX Stock Splits," Journal of Finance, American Finance Association, vol. 46(1), pages 421-431, March.
    5. Patrick Dennis, 2003. "Stock Splits and Liquidity: The Case of the Nasdaq-100 Index Tracking Stock," The Financial Review, Eastern Finance Association, vol. 38(3), pages 415-433, August.
    6. Michael T. Maloney & J. Harold Mulherin, 1992. "The Effects of Splitting on the Ex: A Microstructure Reconciliation," Financial Management, Financial Management Association, vol. 21(4), Winter.
    7. 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.
    8. Angel, James J, 1997. " Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-681, June.
    9. Ohlson, James A. & Penman, Stephen H., 1985. "Volatility increases subsequent to stock splits: An empirical aberration," Journal of Financial Economics, Elsevier, vol. 14(2), pages 251-266, June.
    10. Nayar, Nandkumar & Rozeff, Michael S., 2001. "Record Date, When-Issued, and Ex-Date Effects in Stock Splits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 119-139, March.
    11. Easley, David & O'Hara, Maureen & Saar, Gideon, 2001. "How Stock Splits Affect Trading: A Microstructure Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 25-51, March.
    12. Bessembinder, Hendrik, 1999. "Trade Execution Costs on NASDAQ and the NYSE: A Post-Reform Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(03), pages 387-407, September.
    13. Gray, Stephen F. & Smith, Tom & Whaley, Robert E., 2003. "Stock splits: implications for investor trading costs," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 271-303, May.
    14. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
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