Skip to main content Accessibility help

Institutional Investors and the Information Production Theory of Stock Splits

  • Thomas J. Chemmanur (a1), Gang Hu (a2) and Jiekun Huang (a3)


We make use of a large sample of transaction-level institutional trading data to test an extended version of Brennan and Hughes’ (1991) information production theory of stock splits. We compare brokerage commissions paid by institutional investors before and after a split, assess the private information held by them, and relate the informativeness of their trading to brokerage commissions paid. We show that institutions make abnormal profits net of brokerage commissions by trading in splitting stocks. We also show that the information asymmetry faced by firms goes down after stock splits. Overall, our empirical results support the information production theory.


Corresponding author

*Corresponding author:


Hide All
Admati, A. R., and Pfleiderer, P.. “A Monopolistic Market for Information.” Journal of Economic Theory, 39 (1986), 400438.
Admati, A. R., and Pfleiderer, P.. “Direct and Indirect Sale of Information.” Econometrica, 58 (1990), 901928.
Allen, F. “The Market for Information and the Origin of Financial Intermediation.” Journal of Financial Intermediation, 1 (1990), 330.
Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs.” Review of Financial Studies, 25 (2012), 557598.
Angel, J. “Tick Size, Share Price, and Stock Splits.” Journal of Finance, 52 (1997), 655681.
Baker, M.; Greenwood, R.; and Wurgler, J.. “Catering through Nominal Share Prices.” Journal of Finance, 64 (2009), 25592590.
Barber, B. M., and Lyon, J. D.. “Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 43 (1997), 341372.
Bhushan, R. “Collection of Information about Publicly Traded Firms: Theory and Evidence.” Journal of Accounting and Economics, 11 (1989a), 183206.
Bhushan, R. “Firm Characteristics and Analyst Following.” Journal of Accounting and Economics, 11 (1989b), 255274.
Brennan, M. J., and Chordia, T.. “Brokerage Commission Schedules.” Journal of Finance, 48 (1993), 13791402.
Brennan, M. J., and Copeland, T. E.. “Stock Splits, Stock Prices, and Transaction Costs.” Journal of Financial Economics, 22 (1988), 83101.
Brennan, M. J., and Hughes, P. J.. “Stock Prices and the Supply of Information.” Journal of Finance, 46 (1991), 16651691.
Conrad, J. S.; Johnson, K. M.; and Wahal, S.. “Institutional Trading and Soft Dollars.” Journal of Finance, 56 (2001), 397416.
Copeland, T. E. “Liquidity Changes Following Stock Splits.” Journal of Finance, 34 (1979), 115141.
Desai, H., and Jain, P. C.. “Long-Run Common Stock Returns Following Stock Splits and Reverse Splits.” Journal of Business, 70 (1997), 409433.
Diamond, D. W., and Verrecchia, R. E.. “Information Aggregation in a Noisy Rational Expectations Economy.” Journal of Financial Economics, 9 (1981), 221235.
Dyl, E. A., and Elliott, W. B.. “The Share Price Puzzle.” Journal of Business, 79 (2006), 20452066.
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.
Fernando, C. S.; Krishnamurthy, S.; and Spindt, P. A.. “Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover and Performance of IPO Firms.” Journal of Financial Markets, 7 (2004), 377403.
Frankel, R.; Kothari, S. P.; and Weber, J.. “Determinants of the Informativeness of Analyst Research.” Journal of Accounting and Economics, 41 (2006), 2954.
Gibson, S.; Safieddine, A.; and Sonti, R.. “Smart Investments by Smart Money: Evidence from Seasoned Equity Offerings.” Journal of Financial Economics, 72 (2004), 581604.
Goldstein, M.; Irvine, P.; Kandel, E.; and Wiener, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 51755212.
Gompers, P., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229259.
Grinblatt, M. S.; Masulis, R. W.; and Titman, S.. “The Valuation Effects of Stock Splits and Stock Dividends.” Journal of Financial Economics, 13 (1984), 461490.
Grossman, S. J. “On the Efficiency of Competitive Stock Prices Where Traders Have Diverse Information.” Journal of Finance, 31 (1976), 573585.
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393408.
Ikenberry, D., and Ramnath, S.. “Underreaction to Self-Selected News Events: The Case of Stock Splits.” Review of Financial Studies, 15 (2002), 489526.
Ikenberry, D.; Rankine, G.; and Stice, E. K.. “What Do Stock Splits Really Signal?” Journal of Financial and Quantitative Analysis, 31 (1996), 357375.
Irvine, P.; Lipson, M.; and Puckett, A.. “Tipping.” Review of Financial Studies, 20 (2007), 742768.
Jones, C. M., and Lipson, M.. “Sixteenths: Direct Evidence on Institutional Execution Costs.” Journal of Financial Economics, 59 (2001), 253278.
Keim, D. B., and Madhavan, A.. “Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Traders.” Journal of Financial Economics, 37 (1995), 371398.
Lamoureux, C. G., and Poon, P.. “The Market Reaction to Stock Splits.” Journal of Finance, 42 (1987), 13471370.
Lang, M., and Lundholm, R.. “Corporate Disclosure Policy and Analyst Behavior.” Accounting Review, 71 (1996), 467492.
Lin, J. C.; Singh, A. K.; and Yu, W.. “Stock Splits, Trading Continuity, and the Cost of Equity Capital.” Journal of Financial Economics, 93 (2009), 474489.
McNichols, M., and Dravid, A.. “Stock Dividends, Stock Splits, and Signaling.” Journal of Finance, 45 (1990), 857879.
O’Brien, P., and Bhushan, R.. “Analyst Following and Institutional Ownership.” Journal of Accounting Research, 28 (1990), 5576.
Ohlson, J. A., and Penman, S. H.. “Volatility Increases Subsequent to Stock Splits: An Empirical Aberration.” Journal of Financial Economics, 14 (1985), 251266.
Parrino, R.; Sias, R. W.; and Starks, L. T.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 346.
Perold, A. F. “The Implementation Shortfall: Paper versus Reality.” Journal of Portfolio Management, 14 (1988), 49.
Schultz, P. “Stock Splits, Tick Size, and Sponsorship.” Journal of Finance, 55 (2000), 429450.
Verrecchia, R. E. “Information Acquisition in a Noisy Rational Expectations Economy.” Econometrica, 50 (1982), 14151430.
Yan, X. S., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2009), 893924.

Institutional Investors and the Information Production Theory of Stock Splits

  • Thomas J. Chemmanur (a1), Gang Hu (a2) and Jiekun Huang (a3)


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed