Changes in Trading Activity Following Stock Splits and Their Effect on Volatility and the Adverse Information Component of the Bid-Ask Spread
Anand S. Desai
Kansas State University
University of Florida - Department of Finance, Insurance and Real Estate
Journal of Financial Research, Summer 1998
We examine changes in trading activity around stock splits, and their effect on the volatility and the adverse information component of the bid-ask spread. Even after controlling for microstructure biases, we find a significant increase in the volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.
JEL Classification: G12, G14
Date posted: April 18, 1998
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