The effect of stock splits on iShare exchange‐traded funds

Abstract

Purpose

The purpose of this paper is to examine the pre‐ and post‐split behavior for trades and quotes of iShare exchange‐traded funds (ETFs) that split in June 2005. The objective is to determine whether post‐split changes in the bid‐ask spread, trade turnover, average dollar‐size trade, frequency of small trades, trade price location, and order imbalance support either or both of the two widely examined hypotheses for the motivation for share splits.

Design/methodology/approach

The impact of the iShares split around the split date was studied, using the measures above to examine the support, if any, for each of two hypotheses, broker promotion and/or the trading inconvenience, with regard to the sample and time period under study.

Findings

Bid‐ask spread, average dollar order size, and frequency of small trades were found to fail to reject the broker‐promotion hypothesis, while the increase in post‐split turnover fails to reject the trading‐inconvenience hypothesis. Changes in the trade‐price‐location parameter and in order imbalance fail to support either hypothesis.

Practical implications

Because of the importance of basket securities in the determination of the prices for listed securities, issuers of these securities, investors and regulators should be interested whether the price behavior of splitting iShares is similar to that experienced in other securities.

Originality/value

Numerous studies in the literature have investigated the effects of stock splits on individual securities, but it is believed, none has yet appeared studying the recent splits in iShares.

Citation

Bandyopadhyay, P., Hackard, J. and Tse, Y. (2010), "The effect of stock splits on iShare exchange‐traded funds", Managerial Finance, Vol. 36 No. 2, pp. 134-159. https://doi.org/10.1108/03074351011014550