Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-05T14:33:55.517Z Has data issue: false hasContentIssue false
  • English
  • Français

Institutional Investors and the Information Production Theory of Stock Splits

Published online by Cambridge University Press:  04 August 2015

Thomas J. Chemmanur ,
Gang Hu  and
Jiekun Huang
Thomas J. Chemmanur*
Affiliation:
[email protected], Boston College, Carroll School of Management, Chestnut Hill, MA 02467
Gang Hu
Affiliation:
[email protected], Hong Kong Polytechnic University, School of Accounting and Finance, Kowloon, Hong Kong
Jiekun Huang
Affiliation:
[email protected], University of Illinois at Urbana-Champaign, College of Business, Champaign, IL 61820.
*
*Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We make use of a large sample of transaction-level institutional trading data to test an extended version of Brennan and Hughes’ (1991) information production theory of stock splits. We compare brokerage commissions paid by institutional investors before and after a split, assess the private information held by them, and relate the informativeness of their trading to brokerage commissions paid. We show that institutions make abnormal profits net of brokerage commissions by trading in splitting stocks. We also show that the information asymmetry faced by firms goes down after stock splits. Overall, our empirical results support the information production theory.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 413 - 445
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “A Monopolistic Market for Information.” Journal of Economic Theory, 39 (1986), 400–438.Google Scholar
Admati, A. R., and Pfleiderer, P.. “Direct and Indirect Sale of Information.” Econometrica, 58 (1990), 901–928.Google Scholar
Allen, F. “The Market for Information and the Origin of Financial Intermediation.” Journal of Financial Intermediation, 1 (1990), 3–30.Google Scholar
Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs.” Review of Financial Studies, 25 (2012), 557–598.CrossRefGoogle Scholar
Angel, J. “Tick Size, Share Price, and Stock Splits.” Journal of Finance, 52 (1997), 655–681.Google Scholar
Baker, M.; Greenwood, R.; and Wurgler, J.. “Catering through Nominal Share Prices.” Journal of Finance, 64 (2009), 2559–2590.Google Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 43 (1997), 341–372.Google Scholar
Bhushan, R. “Collection of Information about Publicly Traded Firms: Theory and Evidence.” Journal of Accounting and Economics, 11 (1989a), 183–206.Google Scholar
Bhushan, R. “Firm Characteristics and Analyst Following.” Journal of Accounting and Economics, 11 (1989b), 255–274.Google Scholar
Brennan, M. J., and Chordia, T.. “Brokerage Commission Schedules.” Journal of Finance, 48 (1993), 1379–1402.Google Scholar
Brennan, M. J., and Copeland, T. E.. “Stock Splits, Stock Prices, and Transaction Costs.” Journal of Financial Economics, 22 (1988), 83–101.Google Scholar
Brennan, M. J., and Hughes, P. J.. “Stock Prices and the Supply of Information.” Journal of Finance, 46 (1991), 1665–1691.Google Scholar
Conrad, J. S.; Johnson, K. M.; and Wahal, S.. “Institutional Trading and Soft Dollars.” Journal of Finance, 56 (2001), 397–416.Google Scholar
Copeland, T. E. “Liquidity Changes Following Stock Splits.” Journal of Finance, 34 (1979), 115–141.Google Scholar
Desai, H., and Jain, P. C.. “Long-Run Common Stock Returns Following Stock Splits and Reverse Splits.” Journal of Business, 70 (1997), 409–433.Google Scholar
Diamond, D. W., and Verrecchia, R. E.. “Information Aggregation in a Noisy Rational Expectations Economy.” Journal of Financial Economics, 9 (1981), 221–235.CrossRefGoogle Scholar
Dyl, E. A., and Elliott, W. B.. “The Share Price Puzzle.” Journal of Business, 79 (2006), 2045–2066.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fernando, C. S.; Krishnamurthy, S.; and Spindt, P. A.. “Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover and Performance of IPO Firms.” Journal of Financial Markets, 7 (2004), 377–403.CrossRefGoogle Scholar
Frankel, R.; Kothari, S. P.; and Weber, J.. “Determinants of the Informativeness of Analyst Research.” Journal of Accounting and Economics, 41 (2006), 29–54.Google Scholar
Gibson, S.; Safieddine, A.; and Sonti, R.. “Smart Investments by Smart Money: Evidence from Seasoned Equity Offerings.” Journal of Financial Economics, 72 (2004), 581–604.CrossRefGoogle Scholar
Goldstein, M.; Irvine, P.; Kandel, E.; and Wiener, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 5175–5212.Google Scholar
Gompers, P., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.Google Scholar
Grinblatt, M. S.; Masulis, R. W.; and Titman, S.. “The Valuation Effects of Stock Splits and Stock Dividends.” Journal of Financial Economics, 13 (1984), 461–490.CrossRefGoogle Scholar
Grossman, S. J. “On the Efficiency of Competitive Stock Prices Where Traders Have Diverse Information.” Journal of Finance, 31 (1976), 573–585.CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Ikenberry, D., and Ramnath, S.. “Underreaction to Self-Selected News Events: The Case of Stock Splits.” Review of Financial Studies, 15 (2002), 489–526.Google Scholar
Ikenberry, D.; Rankine, G.; and Stice, E. K.. “What Do Stock Splits Really Signal?” Journal of Financial and Quantitative Analysis, 31 (1996), 357–375.Google Scholar
Irvine, P.; Lipson, M.; and Puckett, A.. “Tipping.” Review of Financial Studies, 20 (2007), 742–768.Google Scholar
Jones, C. M., and Lipson, M.. “Sixteenths: Direct Evidence on Institutional Execution Costs.” Journal of Financial Economics, 59 (2001), 253–278.Google Scholar
Keim, D. B., and Madhavan, A.. “Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Traders.” Journal of Financial Economics, 37 (1995), 371–398.Google Scholar
Lamoureux, C. G., and Poon, P.. “The Market Reaction to Stock Splits.” Journal of Finance, 42 (1987), 1347–1370.Google Scholar
Lang, M., and Lundholm, R.. “Corporate Disclosure Policy and Analyst Behavior.” Accounting Review, 71 (1996), 467–492.Google Scholar
Lin, J. C.; Singh, A. K.; and Yu, W.. “Stock Splits, Trading Continuity, and the Cost of Equity Capital.” Journal of Financial Economics, 93 (2009), 474–489.Google Scholar
McNichols, M., and Dravid, A.. “Stock Dividends, Stock Splits, and Signaling.” Journal of Finance, 45 (1990), 857–879.Google Scholar
O’Brien, P., and Bhushan, R.. “Analyst Following and Institutional Ownership.” Journal of Accounting Research, 28 (1990), 55–76.Google Scholar
Ohlson, J. A., and Penman, S. H.. “Volatility Increases Subsequent to Stock Splits: An Empirical Aberration.” Journal of Financial Economics, 14 (1985), 251–266.Google Scholar
Parrino, R.; Sias, R. W.; and Starks, L. T.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 3–46.CrossRefGoogle Scholar
Perold, A. F. “The Implementation Shortfall: Paper versus Reality.” Journal of Portfolio Management, 14 (1988), 4–9.Google Scholar
Schultz, P. “Stock Splits, Tick Size, and Sponsorship.” Journal of Finance, 55 (2000), 429–450.Google Scholar
Verrecchia, R. E. “Information Acquisition in a Noisy Rational Expectations Economy.” Econometrica, 50 (1982), 1415–1430.Google Scholar
Yan, X. S., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2009), 893–924.CrossRefGoogle Scholar