| A popular conjecture about the motivation for reverse splits is that a higher post split share price attracts more institutional investors and improves the market for firms' stock. We investigate the effect of reverse splits on stock prices, ownership structure, transaction costs, liquidity, trading activity, volatility, and the adverse selection component of the spread.;Consistent with previous studies, we find significant negative abnormal returns on the split date, but the negative reaction is not statistically significant for NYSE stocks with post-split prices equal to or above ;For post split share prices greater than ;Split-adjusted depth and trading volume after reverse splits declines significantly. These findings support liquidity motivated reverse splits. Furthermore, the dollar trading volume increases significantly after reverse splits. In summary, all liquidity measures—spreads, depths, and volume—improve following reverse splits.;For the change in volatility after the reverse splits, consistent with Conroy, Harris, and Benet (1990), who indicate that the decrease in percentage spread associated with the decrease in volatility after splits, and that the significant changes in percentage spreads explain the change in volatility after the reverse splits. However, contrary to Kamara and Koski (2001), we find that find no statistically significant relation between volatility and the number of small trades.;We find a significant decrease (increase) in the percentage of small (large) following the reverse splits. In addition, we find a significant increase in adverse selection components after the reverse splits. |
