Why are Stock Splits Declining?

Abstract

The percentage of firms undertaking stock splits has fallen from a peak of 23% in 1982 to less than 1% in 2009. Controlling for time trends and other economic determinants, the declining incidence of stock splits is significantly associated with a drop in household investors’ equity holdings and with a rise in household income. We also report a decline in the size of split factors which is associated with an increase in institutional ownership of equity and with the increase in household income. Collectively, the evidence is consistent withfirms responding rationally to changes in investor characteristics.

Keywords: Stock Splits, Liquidity, household equity ownership, household income, institutional ownership, split factor

JEL Classification: G31, G32, G35