The Tradeoff between Risk Sharing and Information Production in Financial Markets: Evidence from Stock Splits

44 Pages Posted: 17 Sep 2015

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xiaorong Ma

University of Hong Kong - School of Business; National Taiwan University - College of Management

Date Written: September 16, 2015

Abstract

We show that three proxies for stock price informativeness, adjusted probability of information based trading (AdjPIN), price non-synchronicity and probability of information-based trading (PIN), decrease significantly due to an enlarged investor base after stock splits. The results are supportive to the risk sharing hypothesis proposed by Peress (2010) who argues that investors are less incentivized to gather firm specific information when firms investor base expands. Furthermore, we find that the change of the price informativeness around splits is negatively related to the magnitude of positive return drifts following splits. This result is consistent with the notion that less information produced and incorporated in stock prices results in a sluggish response by the market to corporate events.

Keywords: risk sharing, stock price informativeness, stock split, long run stock returns, post-split return drifts

JEL Classification: G10; G11; G12; G35

Suggested Citation

Chang, Eric Chieh C. and Lin, Tse-Chun and Ma, Xiaorong, The Tradeoff between Risk Sharing and Information Production in Financial Markets: Evidence from Stock Splits (September 16, 2015). Available at SSRN: https://ssrn.com/abstract=2661293 or http://dx.doi.org/10.2139/ssrn.2661293

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xiaorong Ma

University of Hong Kong - School of Business ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

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