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Stock Splits, Broker Promotion, and Decimalization

Published online by Cambridge University Press:  06 April 2009

Palani-Rajan Kadapakkam ,
Srinivasan Krishnamurthy  and
Yiuman Tse
Palani-Rajan Kadapakkam
Affiliation:
palanirajan.kadapakk@utsa.edu, Department of Finance, University of Texas at San Antonio, San Antonio, TX 78249
Srinivasan Krishnamurthy
Affiliation:
srinik@binghamton.edu, School of Management, State University of New York-Binghamton, Binghamton, NY 13902
Yiuman Tse
Affiliation:
yiuman.tse@utsa.edu, College of Business, University of Texas at San Antonio, 501 West Durango Blvd., San Antonio, TX 78207.
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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 decreases 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 ex-date during the 1/8th pricing period, but not in the decimal pricing period. These results support the broker promotion hypothesis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 4 , December 2005 , pp. 873 - 895
Copyright
Copyright © School of Business Administration, University of Washington 2005

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