Measurement effects and the variance of returns after stock splits and stock dividends

This article examines the relation between two factors affecting stock returns, the bid-ask spread and price discreteness, and the increase in return variance after ex-dates of stock splits and stock dividends. Controlling for these effects, the variance of daily returns still increases sig-nificantly. The variance of weekly returns also increases significantly, and the variance of re-turns for a control sample of nonsplitting firms shows no significant increase. Variance ratio tests show that bid-ask errors are small for these stocks and therefore cannot explain the large increase in variance. Spreads and price discreteness do not explain increased variance after stock distributions. In a perfect market, the market value of a firm’s equity is independent of the number of shares outstanding. Therefore the ex-date for a stock dividend or stock split should simply involve a change in the number of shares outstanding along with a change in the level of the stock price. There should be no change in the distribution of stock returns around ex-dates of stock dividends and stock splits. Previous research has documented changes in stock return distributions This research has benefited from comments from seminar participants at th