The Nuisance of Stock Distributions

Abstract

We re-examine the abnormal stock return over the ex-day of stock splits, stock dividends, and rights offers with an extended version of the model by Frank and Jagannathan (1998). Regression analysis suggests that an underlying nuisance cost in the amount of 0.57% of the stock price and a bid-ask bounce that occurs with probability 23% capture the essential cross-section variation in the abnormal stock return. Further analysis of bid and ask quotes questions the bid-ask-bounce interpretation. The nuisance cost of stock distributions decreases over time, and it vanishes with high-frequency trading. With the development of internet, share price management falls out of fashion, and stock distributions are no longer a concern.

Keywords: integer stock splits, fractional stock splits, rights offers, abnormal stock return, share price management

JEL Classification: G14, G24