Why Stock Splits? Evidence from Institutional Ownership
Posted: 25 Sep 1999
This study examines the motives for stock splits in the context of the announcing firm's institutional ownership. We report an inverse relationship between the magnitude of announcement period abnormal returns and the percentage of the firm's institutional ownership, indicating that stock splits are more valuable to firms with low institutional ownership. Results also suggest that the motivation for initiating stock splits is not uniform across firms; rather it is contingent upon the firm's pre-split institutional ownership. Firms with low pre-split institutional ownership experience significant increases in the number of institutional shareholders following stock splits. In contrast, firms with high pre-split institutional ownership stabilize the proportion of their shares owned by institutions following stock splits. Overall the evidence suggests that announcements of stock splits attract the attention of financial analysts to undervalued firms and induce changes in post-split institutional ownership.
JEL Classification: D21
Suggested Citation: Suggested Citation