Changes in Trading Patterns Following Stock Splits and Their Impact on Market Microstructure: Theory and Evidence

Posted: 28 Jul 1999

See all articles by Anand S. Desai

Anand S. Desai

Kansas State University

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Subu Venkataraman

Morgan Stanley

Date Written: April 1994

Abstract

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

Desai, Anand S. and Nimalendran, Mahendrarajah and Venkataraman, Subu, Changes in Trading Patterns Following Stock Splits and Their Impact on Market Microstructure: Theory and Evidence (April 1994). Available at SSRN: https://ssrn.com/abstract=5539

Anand S. Desai (Contact Author)

Kansas State University ( email )

110 Calvin Hall
Manhattan, KS 66506
United States
785-532-6892 (Phone)
785-532-7024 (Fax)

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9526 (Phone)
352-392-0301 (Fax)

Subu Venkataraman

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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