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The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker

Received: 19 November 2021     Accepted: 20 December 2021     Published: 31 December 2021
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Abstract

We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.

Published in International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 6)
DOI 10.11648/j.ijefm.20210906.19
Page(s) 285-296
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Integer Stock Splits, Fractional Stock Splits, Rights Offers, Abnormal Stock Return, Market Making, Share Price Management

References
[1] Amihud, Yakov, 2002, Illiquidity and stock returns: Cross-section and time-series effects, Journal of Financial Markets 5, 31-56.
[2] Choi, Dosoung, and Robert A. Strong, 1983, The Pricing of when-issued common stock: A note, Journal of Finance 38, 1293-1298.
[3] Conrad, Jennifer S., and Robert Conroy, 1994, Market microstructure and the ex-date return, Journal of Finance 49, 1507-1519.
[4] Corwin, Shane A., and Paul Schultz, 2012, A simple way to estimate bid-ask spreads from daily high and low prices, Journal of Finance 67, 719-759.
[5] Dolley, James C., 1933, Common-stock split-ups----Motives and effects, Harvard Business Review 12, 70-81.
[6] Eades, Kenneth M., Patrick J. Hess, and E. Han Kim, 1984, On interpreting security returns during the ex-dividend period, Journal of Financial Economics 13, 3-34.
[7] Frank, Murray, and Ravi Jagannathan, 1998, Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes, Journal of Financial Economics 47, 161-188.
[8] Goetzman, William N., Roger G. Ibbotson, and Liang Peng, 2001, A new historical database for the NYSE 1815 to 1925: Performance and predictability, Journal of Financial Markets 4, 1-32.
[9] Graham, John R., Roni Michaely, and Michael R. Roberts, 2003, Do price discreteness and transactions costs affect stock returns? Comparing ex-dividend pricing before and after decimalization, Journal of Finance 58, 2611-2636.
[10] Grinblatt, Mark S., Ronald W. Masulis, and Sheridan Titman, 1984, The valuation effects of stock splits and stock dividends, Journal of Financial Economics 13, 461-490.
[11] Jones, Charles M., 2002, A century of stock market liquidity and trading costs, Working Paper.
[12] Maloney, Michael T., and J. Harold Mulherin, 1992, The effects of splitting on the Ex: A microstructure reconciliation, Financial Management 4, 44-59.
[13] Minnick, Kristina, and Kartik Raman, 2014, Why are stock splits declining, Financial Management 43, 29-60.
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  • APA Style

    Rong Guo, Kristian Rydqvist. (2021). The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. International Journal of Economics, Finance and Management Sciences, 9(6), 285-296. https://doi.org/10.11648/j.ijefm.20210906.19

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    ACS Style

    Rong Guo; Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int. J. Econ. Finance Manag. Sci. 2021, 9(6), 285-296. doi: 10.11648/j.ijefm.20210906.19

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    AMA Style

    Rong Guo, Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int J Econ Finance Manag Sci. 2021;9(6):285-296. doi: 10.11648/j.ijefm.20210906.19

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  • @article{10.11648/j.ijefm.20210906.19,
      author = {Rong Guo and Kristian Rydqvist},
      title = {The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {9},
      number = {6},
      pages = {285-296},
      doi = {10.11648/j.ijefm.20210906.19},
      url = {https://doi.org/10.11648/j.ijefm.20210906.19},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210906.19},
      abstract = {We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.},
     year = {2021}
    }
    

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    AU  - Rong Guo
    AU  - Kristian Rydqvist
    Y1  - 2021/12/31
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    DO  - 10.11648/j.ijefm.20210906.19
    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
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    EP  - 296
    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20210906.19
    AB  - We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.
    VL  - 9
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    ER  - 

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Author Information
  • College of Business, Illinois State University, Normal, the United States

  • School of Management, SUNY at Binghamton, Binghamton, the United States

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