Stock Splits, Tick Size, and Sponsorship


  • Paul Schultz

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    • University of Notre Dame. I began this paper while still on the faculty at Ohio State University. I am indebted to the Charles A. Dice Center for Financial Research at Ohio State University for financial support. Useful comments on this paper were provided by John Affleck-Graves, James Angel, Robert Battalio, Michael Long, Richard Mendenhall, David Mayers, Timothy McCormick, George Sofianos, René Stulz, and workshop participants at the University of California at Riverside, Georgetown University, and the University of Notre Dame. Comments of an anonymous referee improved the paper significantly. Any remaining errors are entirely the fault of the author.


A traditional explanation for stock splits is that they increase the number of small shareholders who own the stock. A possible reason for the increase is that the minimum bid-ask spread is wider after a split and brokers have more incentive to promote a stock. I document a large number of small buy orders following Nasdaq and NYSE/AMEX splits during 1993 to 1994. I also find strong evidence that trading costs increase, and weak evidence that costs of market making decline following splits. This is consistent with splits acting as an incentive to brokers to promote stocks.