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CHANGES IN TRADING ACTIVITY FOLLOWING STOCK SPLITS AND THEIR EFFECT ON VOLATILITY AND THE ADVERSE‐INFORMATION COMPONENT OF THE BID‐ASK SPREAD
Author(s) -
Desai Anand S.,
Nimalendran M.,
Venkataraman S.
Publication year - 1998
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1998.tb00678.x
Subject(s) - volatility (finance) , stock (firearms) , market liquidity , bid–ask spread , economics , econometrics , monetary economics , financial economics , business , geography , archaeology
We examine changes in trading activity around stock splits and their effect on volatility and the adverse‐information component of the bid‐ask spread. Even after controlling for microstructure biases, we find a significant increase in volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse‐information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.