Stock-Splits, The Bid-Ask Spread And The Information Hypothesis

Abstract

Though many plausible explanations have been offered, the behavior of splitting shares remains an anomaly. Parameters of the stock return distribution shift around the time of the split announcement despite the fact that there is no obvious economic significance to the splitting of a firm’s shares. This paper directly examines the Information Hypothesis as an explanation for the observed increase in means and variance of stock returns at the time of the split announcement. Results from an analysis of all splitting shares on the CRSP Tap reveals a relationship between the bid-ask spread and trading volume that is consistent with the Information Hypothesis.