The Effect of Stock Splits on the Ownership Structure of Firms
Posted: 2 Jun 2000 Last revised: 20 Nov 2016
Date Written: September 1, 1994
This paper investigates the effect of stock splits on individual and institutional shareholders, which has been a matter of speculation in several studies. We test a broad sample of firms without confounding events and control for industry and size effects. Our results show that stock splits increase the number of both individual and institutional shareholders, and they do not affect the proportion of institutional holdings. Contrary to the prediction of the tax-option hypothesis, the Tax Reform Act of 1986 does not affect these results. Further, changes in the number of individual and institutional shareholders in the split year are positively related to the split factor. These results support the signaling hypothesis, but are inconsistent with the optimal trading range, tax-option, and managerial entrenchment hypothesis. We also find evidence suggesting that stock splits may be partially anticipated by institutional shareholders.
JEL Classification: G32
Suggested Citation: Suggested Citation