The Effects of Splitting on the Ex: A Microstructure Reconciliation

Abstract

Our research investigates stock splits: why they happen, how they affect shareholder wealth, and whether they enhance liquidity for splitting firms. Prior research has not reached a clear-cut answer as to the role of stock splits. While there is definitely a favorable stock price reaction to the announcement of splits, the reason for the positive announcement return is not well-determined. Conventional wisdom suggests that the benefit of splits comes from improved share liquidity; yet empirical evidence has produced ambiguous results on liquidity. More detailed theoretical arguments pose stock splits as part of a strategy used by management to signal value, yet such arguments seem overly complex for such a basic management decision. Moreover, in spite of complex explanations, an anomaly remains: splitting firms also experience positive returns on the split execution day. This event is known well in advance, so any associated favorable information should already be priced into the stock.