WHEN-ISSUED SHARES, SMALL TRADES, AND THE VARIANCE OF RETURNS AROUND STOCK SPLITS
The increases in volatility after stock splits have long puzzled researchers. The usual suspects of discreteness and bid-ask spread do not provide a complete explanation. We provide new clues to solve this mystery by examining the trading of when-issued shares that are available before the split. When-issued trading permits noise traders to compete with a more homogenous set of traders, decreasing the volatility of the stock before the split. Following the split, these noise traders reunite in one market and volatility increases. Thus, the higher volatility after the ex date of a stock split is a function of the introduction of when-issued trading, the new lower price level after the split date, and the increased activity of small-volume traders around a stock split. 2004 The Southern Finance Association and the Southwestern Finance Association.
Year of publication: |
2004
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Authors: | Angel, James J. ; Brooks, Raymond M. ; Mathew, Prem G. |
Published in: |
Journal of Financial Research. - Southern Finance Association - SFA, ISSN 0270-2592. - Vol. 27.2004, 3, p. 415-433
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Publisher: |
Southern Finance Association - SFA Southwestern Finance Association - SWFA |
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