The Effects of Stock Splits on Bid-Ask Spreads

Authors

  • ROBERT M. CONROY,

  • ROBERT S. HARRIS,

  • BRUCE A. BENET

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    • Conroy and Harris are on the faculty of the Darden School, University of Virginia. Benet is at De Paul University. We thank Jennifer Conrad, Ken Eades, Mark Flannery, Thomas O'Brien, and anonymous referees for comments.


ABSTRACT

This paper examines the effects of stock splits on bid-ask spreads for NYSE-listed companies. Percentage spreads increase after splits, representing a liquidity cost to investors. These spread increases are directly related to decreases in share prices following splits and can explain part, but not all, of the observed increase in return variability after splits. The evidence thus suggests a liquidity cost of stock splits that must be weighed against any other perceived benefits of splits. Such a liquidity cost may validate that stock splits are a signal of favorable information about the firm.

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