The Effects of ETF Splits on Returns, Liquidity, and Individual Investors

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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 found for the existence of momentum in stock price indexes. Research limitations/implications – The effects of splits are examined in a larger group of ETFs that includes less-heavily traded stocks than the QQQ. These smaller ETFs potentially have more to gain in terms of increased investor interest than the QQQ. Originality/value – Positive excess returns were found in the split ETFs before and after the split. This is consistent with the tendency for stocks to be split following a large price run-up, and with momentum theory. Also, significant increases were found in total capital under management and shares outstanding after the splits for the splitting stocks. This is consistent with the hypothesis that a key goal of managers is to increase their compensation via higher total capital under management. Finally, significant increases were found in the number of small trades and dollar values of trades as a percentage of all trades (and of total dollar volumes) in the split sample. These results support the hypothesis that a primary objective (and result) of ETF stock splits is to make the shares more attractive to individual investors – despite possible deterioration of liquidity as evidenced by wider bid/ask spreads.



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