Price and tick size preferences in trading activity changes around stock split executions
We investigate the low prices preferences and the optimal relative tick size hypotheses, as possible explanations of the stock split execution effects in a pure order-driven and multi-tick market. Using intraday data for the Spanish Stock Exchange during 1997-2001, we find that stock splits do not improve liquidity but do change trading composition. Following splits, small trades from retail investors increase significantly, especially in the larger stock splits. However, we find that this effect seems to disappear with the new tick-size rules adopted by Spanish market in 1999. We extend the optimal relative tick size hypothesis for a multi-tick market by considering the effects of stock splits on the absolute tick size. We observe that the increase in small trades occurs only in those splits that increase the relative tick and decrease the tick-size simultaneously. Our findings suggest that small investors are attracted by stock splits that cause an absolute tick-size reduction, which are those with relatively lower transaction costs. Copyright Springer-Verlag Berlin/Heidelberg 2005
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Volume (Year): 7 (2005)
Issue (Month): 2 (06)
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