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Institutional Investors and the Information Production Theory of Stock Splits

Published online by Cambridge University Press:  04 August 2015

Thomas J. Chemmanur ,
Gang Hu  and
Jiekun Huang
Thomas J. Chemmanur*
Affiliation:
[email protected], Boston College, Carroll School of Management, Chestnut Hill, MA 02467
Gang Hu
Affiliation:
[email protected], Hong Kong Polytechnic University, School of Accounting and Finance, Kowloon, Hong Kong
Jiekun Huang
Affiliation:
[email protected], University of Illinois at Urbana-Champaign, College of Business, Champaign, IL 61820.
*
*Corresponding author: [email protected]
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Abstract

We make use of a large sample of transaction-level institutional trading data to test an extended version of Brennan and Hughes’ (1991) information production theory of stock splits. We compare brokerage commissions paid by institutional investors before and after a split, assess the private information held by them, and relate the informativeness of their trading to brokerage commissions paid. We show that institutions make abnormal profits net of brokerage commissions by trading in splitting stocks. We also show that the information asymmetry faced by firms goes down after stock splits. Overall, our empirical results support the information production theory.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 413 - 445
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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