The Market Reaction to Stock Splits

Research output: Contribution to journalArticlepeer-review

195 Scopus citations


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. 1987 The American Finance Association

Original languageEnglish (US)
Pages (from-to)1347-1370
Number of pages24
JournalThe Journal of Finance
Issue number5
StatePublished - Dec 1987

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


Dive into the research topics of 'The Market Reaction to Stock Splits'. Together they form a unique fingerprint.

Cite this