Impacts of stock splits on transaction costs under different tick size regimes

Abstract

This study determines the impacts of stock splits on transaction costs under tick sizes of $1/16 and $0.01. Similar to previous studies, stock splits decrease quoted dollar spreads and effective dollar spreads, and they increase quoted percentage spreads and effective percentage spreads. The effect of stock splits, however, differs depending on tick size. Quoted percentage spreads increase 44% with the smaller tick size ($0.01), but increase 56% with the larger tick size ($1/16). Moreover, effective percentage spreads increase 39% with the smaller tick size, but increase 44% with the larger tick size. In addition, under the $1/16 tick size regime stock splits increase quoted depth, but under the $0.01 tick size regime stock splits decrease quoted depth.