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Informed Trading around Stock Split Announcements: Evidence from the Option Market

Published online by Cambridge University Press:  14 March 2017

Philip Gharghori ,
Edwin D. Maberly  and
Annette Nguyen
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Abstract

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Prior research shows that splitting firms earn positive abnormal returns and that they experience an increase in stock return volatility. By examining option-implied volatility, we assess option traders’ perceptions on return and volatility changes arising from stock splits. We find that they do expect higher volatility following splits. There is only weak evidence, though, of option traders anticipating an abnormal increase in stock prices. We also show that our option measures can predict both stock volatility levels and changes after the announcement. However, there is little evidence that they can predict the returns of splitting firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 2 , April 2017 , pp. 705 - 735
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We gratefully acknowledge the helpful comments of seminar participants at Monash University and RMIT University and of conference participants at the 2014 Australasian Finance and Banking Conference, the 2015 European Financial Management Association Conference, the 2014 Multinational Finance Society Conference, the 2015 New Zealand Finance Colloquium, and the 2015 Paul Woolley Centre Conference at the University of Technology Sydney. We are especially grateful to Turan Bali (associate editor and the referee) and Paul Malatesta (the editor) for many helpful comments and suggestions.

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