Institutional ownership around stock splits

Abstract

Studies on the underlying reasons for stock splits can be broadly categorized into two groups: those argue that firms use stock splits to signal favorable private information to the market and those argue that stock splits are used to improve liquidity. We shed light on this issue by examining the change in institutional holdings around stock splits and find that institutional investors, especially short-term investors, increase their holding of the splitting firm's stock. The change in short-term institutional ownership is positively related to the improvement in firm's information environment, especially for less liquid stocks and stocks that are not widely held by institutional investors. Our evidence supports the liquidity hypothesis instead of the signaling hypothesis of stock splits.