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- Title
The Market Reaction to Stock Splits.
- Authors
LAMOUREUX, CHRISTOPHER G.; POON, PERCY
- Abstract
In this paper, a model of market reaction to stock splits is presented and tested. We argue that the announcement of a split sets off the following chain of events. The market recognizes that, subsequent to the (reverse) split ex-day, the daily number of transactions along with the raw volume of shares traded will increase (decrease). This increase in volume results in an increase in the noisiness of the security's return process. The increase in noise raises the tax-option value of the stock, and it is this value that generates the announcement effect of stock splits. Empirical evidence using security returns, daily trading volume, and shareholder data strongly supports this theory. The evidence, in conjunction with this theory, also agrees with extant literature that splits result in decreased liquidity, but there is no evidence that this reduction in liquidity is priced.
- Subjects
STOCK splitting; STOCK exchanges; FINANCIAL market reaction; ECONOMIC models; SECURITIES trading volume; LIQUIDITY (Economics); OPTIONS (Finance); RATE of return; ECONOMIC indicators; STOCK price forecasting; MARKET volatility; FINANCIAL performance
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1347
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04370.x