The Effects of Splitting on the Ex: A Microstructure Reconciliation

Michael Maloney and J. Harold Mulherin

Financial Management, 1992, vol. 21, issue 4

Abstract: Our research investigates stock splits: why they happen, how they affect shareholder wealth, and whether they enhance liquidity for splitting firms. Prior research has not reached a clear-cut answer as to the role of stock splits. While there is definitely a favorable stock price reaction to the announcement of splits, the reason for the positive announcement return is not well-determined. Conventional wisdom suggests that the benefit of splits comes from improved share liquidity; yet empirical evidence has produced ambiguous results on liquidity. More detailed theoretical arguments pose stock splits as part of a strategy used by management to signal value, yet such arguments seem overly complex for such a basic management decision. Moreover, in spite of complex explanations, an anomaly remains: splitting firms also experience positive returns on the split execution day. This event is known well in advance, so any associated favorable information should already be priced into the stock.

Date: 1992
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