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

Posted: 10 Feb 2004

See all articles by James Angel

James Angel

Georgetown University - Department of Finance

Raymond M. Brooks

Oregon State University - College of Business

Prem Mathews

University of Saskatchewan - Department of Finance and Management Science

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

Suggested Citation

Angel, James J. and Brooks, Raymond M. and Mathews, Prem, When-Issued Shares, Small Trades and the Variance of Returns Around Stock Splits. Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=498606

James J. Angel

Georgetown University - Department of Finance ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3765 (Phone)
202-687-4031 (Fax)

Raymond M. Brooks (Contact Author)

Oregon State University - College of Business ( email )

200 Bexell Hall Dept. of Accounting, Finance, International Management
Corvallis, OR 97331
United States
541-737-3687 (Phone)

Prem Mathews

University of Saskatchewan - Department of Finance and Management Science ( email )

College of Commerce
Saskatoon, Saskatchewan S7N 5A7
Canada

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