Academic journal article Quarterly Journal of Finance and Accounting

Attention and Liquidity Effects of Stock Splits by Small Commercial Banks

Academic journal article Quarterly Journal of Finance and Accounting

Attention and Liquidity Effects of Stock Splits by Small Commercial Banks

Article excerpt


It is well established that stock splits evoke significant market reactions, both around the announcement date and the ex date. There is no apparent economic basis because cash flows and the relative stakes in the firm do not change. [1] Reactions around the ex date seem most puzzling because the ex date typically is announced well in advance and rarely changes.

Most split announcements indicate that the firm's motivation for splitting its shares is to move the share price to a supposedly more attractive trading range and to enhance shareholders' liquidity. Small bank shares have relatively low liquidity, trading less than 20 times per day, so improving liquidity can be important for small banks.

Some typical quotes taken from split news releases are:

   The action is designed to make the market price of the company's
   shares more attractive to individual investors. [2]

   The split was advisable to broaden ownership and achieve a more
   popular price level. [3]

   The stock split will allow our shares to trade at a price level
   that is considered more desirable for many investors, which we
   believe will increase their liquidity and marketability. [4]

Grinblatt, Masulis, and Titman (1984) describe a signaling motive for splits that they term the attention hypothesis. According to the attention hypothesis, insiders in small firms who want to disclose favorable information split their shares in order to call attention to the firm, generate interest, and attract a larger following of analysts.

Brennan and Copeland (1988), Grinblatt, Masulis, and Titman (1984), and Ikenberry, Rankine, and Stice (1996) find that split announcement returns are larger for small firms, providing a greater incentive for small firms to split their shares. Small banks are particularly good candidates for exhibiting the attention motive. As observed by Slovin, Sushka, and Polonchek (1992), outsiders find it difficult to ascertain the value of a bank's asset portfolio; in particular, the loan portfolio. Splits that prompt closer examination by investors may be especially important for banks. But Mohanty and Moon (2007) contend that there is less information asymmetry for banks because of additional scrutiny by government regulators and more stringent financial reporting requirements.

Thus, prior research and managerial beliefs and actions suggest at least two possible motives for splits: enhancing liquidity of the shares and attracting attention to firms that are not closely followed by investors. This study examines small banks because they can have both motives due to shares that are relatively thinly traded and asset portfolios that are not well known.

The prior research on signaling effects focuses on share price reaction around the split announcement date, but liquidity effects are best detected around the split ex date. [5] The motive underlying both increasing liquidity and attracting attention is, of course, enhancing the value of the shares. So my investigation proceeds in two stages: (1) Do splits attract attention and/or increase liquidity? (2) If so, which of the motive(s), if either, affect firm value?

Attention Effects

Ross (1989) demonstrates that the rate of information flow has a direct relation to share price variance. A study by Jones, Kaul, and Lipson (1994) indicates that the number of trades per day is one of the most significant determinants of volatility. French and Roll (1986) find that asset prices are more volatile during exchange trading hours compared to non-trading periods. They attribute the increased volatility to either flows of public or private information or to noise-induced pricing errors that occur during trading and conclude that variance increases that persist over longer periods are more likely the result of information flows than noise in the trading process. If increased attention following splits increases information flow, return variance is expected to increase. …

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