When-Issued Shares, Small Trades and the Variance of Returns Around Stock Splits

Abstract:     
The increases in volatility subsequent to stock splits have long puzzled researchers. The usual suspects of discreteness and bid-ask spread do not provide a complete explanation. This paper offers clues to solve this mystery by examining the trading of "when, as and if issued" shares that are available prior to the split. When-issued trading permits noise traders to compete with a more homogenous set of traders decreasing the volatility of the stock prior to the split date. Following the split, these noise traders reunite in one market and volatility increases. This suggests that the higher volatility after the ex-date of a stock split is a function of the introduction of when-issued trading before the ex-date, the new lower price level after the split date, and the increased activity of small-volume traders around a stock split.

JEL Classification: G14

Accepted Paper Series