| Description |
The rationale for stock splits often has been questioned in academic circles given the large amount of evidence illustrating that stock splits provide no real economic benefits to investors. Initial evidence was provided by C. A. Barker in his 1956 study on stock splits in which he illustrated that the price of a stock drops in relation to the size of the split. For example, Barker found that a stock with a price of $21.00 before a three-for-one split would drop to a price of about $7000 after the split. Hence, he concluded that "stock splitups alone do not automatically bring about a lasting increase in the market price of stocks." Thus, investors have more shares after a stock split, but their wealth does not increase. Consequently, investors are no better off than before, and the stock split seems to have been nothing more than an accounting exercise. However, many believe that stock splits do result in a wider ownership base for the firm, i.e., more stockholders. Nevertheless, little empirical evidence supports this claim, except in the aforementioned Barker study which suffers from limitations to be discussed in more detail later in this paper. This study will provide additional and updated evidence on the hypothesis that stock splits increase the ownership base of a corporation. In addition, it is hypothesized that increases in the ownership base result in a higher volume of shares traded. Trading volume has been shown to effect the bid-ask spreads of specialists and dealers. Hence, if it can be shown that this volume increases after a split, and given that bid-ask spreads are inversely related to volume, a real financial rationale for stock splits may be provided. |
