Better Portfolio Diversification – A Neglected Aspect of Stock Splits: Findings from Indian Stock Market

28 Pages Posted: 19 Sep 2012

See all articles by Debabrata Datta

Debabrata Datta

Institute of Management Technology,Nagpur

Pradip Banerjee

National Institute of Industrial Engineering

Date Written: September 19, 2012

Abstract

Several theories like optimal trading range hypothesis, liquidity hypothesis, signaling hypothesis have been advanced in relation to this non-economic corporate event. But still there is need to study the investors’ optimizing behavior after stock split. With this focus on optimization of the investors, we introduce the aspect of diversification, as a factor leading to price and volume response of the split stock.

Economic theory states that when price is lower, there is a tendency for diversification by the investors. In this case there may be increase in demand but there may also be a change in supply on account of change in the attractiveness of offload. This paper studies the change in volume of trade for split stocks in Indian market before and after split to capture this effect. The result shows that the effects on stocks of large priced stock and small priced stock are different, giving credence to diversification theory.

Keywords: stock splits, signaling hypothesis, optimal trading range hypothesis, diversification

JEL Classification: G30, G32, G34

Suggested Citation

Datta, Debabrata and Banerjee, Pradip, Better Portfolio Diversification – A Neglected Aspect of Stock Splits: Findings from Indian Stock Market (September 19, 2012). Available at SSRN: https://ssrn.com/abstract=2148896 or http://dx.doi.org/10.2139/ssrn.2148896

Debabrata Datta (Contact Author)

Institute of Management Technology,Nagpur ( email )

49/24/3, PGM Shah Road
Golf Garden
Kolkata, WB 700033
India
+91 9650388506 (Phone)

Pradip Banerjee

National Institute of Industrial Engineering ( email )

Vihar Lake
Powai
Mumbai, MA 400087
India

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
107
Abstract Views
725
Rank
456,834
PlumX Metrics