Stock Splits, Broker Promotion and Decimalization

Posted: 28 Apr 2005

See all articles by Palani-Rajan Kadapakkam

Palani-Rajan Kadapakkam

University of Texas at San Antonio - Department of Finance

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Yiuman Tse

University of Texas at San Antonio - College of Business

Abstract

Stock split ex-dates are associated with both an increased intensity of small investor buying and a positive abnormal return. The broker promotion hypothesis suggests that the increase in relative spread after a split induces brokers to promote splitting stocks to small investors. The trading inconvenience hypothesis ascribes the ex-split effects to inconveniences such as investors' aversion to dealing with due bills, which is unrelated to relative spreads. The reduction in the bid-ask spread due to decimalization allows us to disentangle these two hypotheses. During the 1/8th pricing period, we show that after the ex-date, the relative spread increases significantly. The average buy order size drops and the frequency of small transactions increases after the split. After decimalization, these changes are smaller in magnitude. We observe significant positive abnormal returns around the exdate during the 1/8th pricing period, but not in the decimal pricing period. These results support the broker promotion hypothesis.

Keywords: Stock splits, decimalization, broker promotion

JEL Classification: G14, G24, G32

Suggested Citation

Kadapakkam, Palani-Rajan and Krishnamurthy, Srinivasan and Tse, Yiuman, Stock Splits, Broker Promotion and Decimalization. Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=708685

Palani-Rajan Kadapakkam

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Yiuman Tse (Contact Author)

University of Texas at San Antonio - College of Business ( email )

Department of Finance
San Antonio, TX 78249
United States
210-458-5314 (Phone)

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