The effects of ETF splits on returns, liquidity, and individual investors

Abstract

Purpose – The purpose of this paper is to extend the literature on the effects of stock splits from mutual funds splits and the QQQ split to 20 exchange traded funds (ETFs) that span a wide variety of indexes. The split sample is compared to a non‐split control sample with similar characteristics between 2000 and 2006. The objectives of this study are to investigate whether the results are different between the split sample and the control sample; and whether these results are similar to other investment vehicles in the existing literature.Design/methodology/approach – The paper examines stock excess returns, total capital, several measures of liquidity, and the premium or discount relative to net present value around the split. It also tests for increases in smaller trades after the split.Findings – The results support the hypothesis that two key management objectives of splitting an ETF stock are to increase demand from retail investors and to increase the total capital under management. Support is also...