DOES VOLATILITY DECREASE AFTER REVERSE STOCK SPLITS?

Jennifer Koski

Journal of Financial Research, 2007, vol. 30, issue 2, 217-235

Abstract: Previous research documents that volatility decreases after reverse stock splits. I show that measurement effects bias observed volatility, especially for lower priced stocks. Based on observed returns, volatility decreases 25% after reverse splits. Controlling for bid–ask bounce, volatility still decreases for stocks with prices above $5.00. However, for stocks below $2.00, volatility increases slightly. The portion of observed volatility attributable to measurement effects declines as the stock price increases and as the minimum tick size decreases. Finally, there is a significant and positive cross‐sectional relation between changes in the number of trades and changes in volatility after reverse splits.

Date: 2007
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