Changes in Trading Patterns Following Stock Splits and Their Impact on Market Microstructure: Theory and Evidence
Posted: 28 Jul 1999
Date Written: April 1994
We reexamine the impact of stock splits on the volatility and liquidity of the stock. We develop a model of trading where the number of informed traders and changes in the volatility and liquidity are endogenously determined by changes in the number of noise traders. Our empirical evidence suggests that the increase in volatility after stock splits cannot be totally attributed to microstructure biases due to the bid-ask bounce and price discreetness. A significant fraction of the increase in volatility is due to an increase in the number of both noise and informed trades. Also consistent with our model's predictions, we find that the stock's liquidity worsens when the number of noise trades either declines or increases by a small amount. On the other hand, liquidity improves for large increases in noise trades, which is consistent with the managerial motive for stock splits. A crucial determinant of the increase in noise trades is the release of positive information to the market soon after the announcement of the split.
JEL Classification: G3, G32, G14
Suggested Citation: Suggested Citation