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How Stock Splits Affect Trading: A Microstructure Approach

Published online by Cambridge University Press:  06 April 2009

David Easley ,
Maureen O'Hara  and
Gideon Saar
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Abstract

Extending an empirical technique developed in Easley, Kiefer, and O'Hara (1996), (1997a), we examine different hypotheses about stock splits. In line with the trading range hypothesis, we find that stock splits attract uninformed traders. However, we also find that informed trading increases, resulting in no appreciable change in the information content of trades. Therefore, we do not find evidence consistent with the hypothesis that stock splits reduce information asymmetries. The optimal tick size hypothesis predicts that stock splits attract limit order trading and this enhances the execution quality of trades. While we find an increase in the number of executed limit orders, their effect is overshadowed by the increase in the costs of executing market orders due to the larger percentage spreads. On balance, the uninformed investors' overall trading costs rise after stock splits.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 1 , March 2001 , pp. 25 - 51
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Easley, Department of Economics, and O'Hara, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853; Saar, Stern School of Business, New York University, New York, NY 10012. We thank Jonathan Karpoff (the editor), Ronald Masulis (associate editor and referee), James Angel, Michael Goldstein, Hans Heidle, Joe Kendrick, the NYSE, and seminar participants at Cornell University, Dartmouth college, and the 2000 Western Finance Association meetings of their help. This research was supported by the National Science Foundation (Grant SBR 9631583).

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