A stock split occurs when a company changes the number of shares it has outstanding. For example, suppose the firm had 1 million shares outstanding and then announced a 2:1 split. The firm would now have 2 million shares outstanding. It is not surprising that the stock price drops after the split, but what continues to leave researchers puzzled is why there is a stock price change on the announcement of the split. For years practitioners have suggested that by making the stock price lower the shares are affordable to a greater number of investors and hence there is greater liquidity and therefore a higher stock price. Other theories include that the news of the split signals better times ahead and subsequently it signals higher future dividends. Dhar, Goetzmann, and Zhu use a cool data set to show that true to theory, more individual investors appear to own (and trade) the stock after the split. However, this is not completely good news. They also find the post-split shares trade more, have higher serial correlations, and move more with the market indices. All in all the results strengthen arguments for both a clientele effect and also the view that splits may make the stock trade less efficiently. [FinanceProfessor.com Annotation]
Authors: Ning Zhu, Ravi Dhar, William N. Goetzmann
Source: Social Science Research Network (SSRN)
Subjects: Finance, Industry Specific
Industry: Investment Banking
Click to Add the First »