Wednesday, July 06, 2005

The Impact of Clientele Changes: Evidence from Stock Splits by Ravi Dhar, William Goetzmann, Ning Zhu

SSRN-The Impact of Clientele Changes: Evidence from Stock Splits by Ravi Dhar, William Goetzmann, Ning Zhu (btw Shane Sheperd is also listed on the actual paper, but not on this link, not sure why, but Shane, I am not purposely not giving you credit!!!)

Ever since the first event study (Fama, French, Jensen, and Roll 1969), people have puzzled at stock splits. Why should splitting a stock matter? Is it a signal of good times ahead? Of a larger dividend? Often. But there are times when splits offer no signal.

Take for instance the the finding by Muscarella and Vetsuypens (1996). They look at splits of ADRs (American Depository Receipts) where the underlying stock did not split. This research design assured no signaling could take place. And sure enough, the ADRs still went up on the news of the split.

So most in the field came back to the view that liquidity mattered and that a lower stock price was affordable to more individual investors.

We now more empirical evidence that supports this liquidity view:

Individual investors are net buyers following stock splits. That is the key finding of this paper by Dhar, Sheperd, Goetzmann, and Zhu. They find:

"strong evidence that a change in investor clientele accompanies a stock split. Following the announcement of a split, individual investors increase their trading of the split stocks by more than 50 percent and also considerably increase their buying intensity. In contrast, our sample of professional traders reduces both their aggregate order flow and the ratio of buy orders to sell orders. Furthermore, less sophisticated individuals, such as investors in non-professional occupations or with lower incomes, comprise a larger fraction of individual investor ownership after stock splits, a phenomenon consistent with the contrast between individuals and institutions."

This is at least consistent with the view that liquidity increases and the firms gets a more diverse investor base following stock splits.

Which may lead to other interesting questions: for instance, if individual investors are worse at monitoring management, then there may be predictable changes following splits (for instance, CEO pay comes to mind immediately).


Dhar, Ravi, Goetzmann, William N. and Zhu, Ning, "The Impact of Clientele Changes: Evidence from Stock Splits" (August 2004). EFA 2005 Moscow Meetings

1 comment:

Anonymous said...

Glad to see that this topic is still so vibrant. The topic of my seminar paper (in my MBA program) was regardin g the signalling effects of stock splits; any articles I read debating the issue warm my heart.