The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker

Rong Guo; Kristian Rydqvist

doi:doi:10.11648/j.ijefm.20210906.19

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The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker

Rong Guo, Kristian Rydqvist

Published in International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 6)

Received: 19 November 2021 Accepted: 20 December 2021 Published: 31 December 2021

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Abstract

We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 6)
DOI	10.11648/j.ijefm.20210906.19
Page(s)	285-296
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Integer Stock Splits, Fractional Stock Splits, Rights Offers, Abnormal Stock Return, Market Making, Share Price Management

References

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[5]	Dolley, James C., 1933, Common-stock split-ups----Motives and effects, Harvard Business Review 12, 70-81.
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[7]	Frank, Murray, and Ravi Jagannathan, 1998, Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes, Journal of Financial Economics 47, 161-188.
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APA Style

Rong Guo, Kristian Rydqvist. (2021). The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. International Journal of Economics, Finance and Management Sciences, 9(6), 285-296. https://doi.org/10.11648/j.ijefm.20210906.19

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ACS Style

Rong Guo; Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int. J. Econ. Finance Manag. Sci. 2021, 9(6), 285-296. doi: 10.11648/j.ijefm.20210906.19

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AMA Style

Rong Guo, Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int J Econ Finance Manag Sci. 2021;9(6):285-296. doi: 10.11648/j.ijefm.20210906.19

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@article{10.11648/j.ijefm.20210906.19,
  author = {Rong Guo and Kristian Rydqvist},
  title = {The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {9},
  number = {6},
  pages = {285-296},
  doi = {10.11648/j.ijefm.20210906.19},
  url = {https://doi.org/10.11648/j.ijefm.20210906.19},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210906.19},
  abstract = {We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.},
 year = {2021}
}

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TY  - JOUR
T1  - The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker
AU  - Rong Guo
AU  - Kristian Rydqvist
Y1  - 2021/12/31
PY  - 2021
N1  - https://doi.org/10.11648/j.ijefm.20210906.19
DO  - 10.11648/j.ijefm.20210906.19
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 285
EP  - 296
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20210906.19
AB  - We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.
VL  - 9
IS  - 6
ER  -

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Author Information

Rong Guo

College of Business, Illinois State University, Normal, the United States
Kristian Rydqvist

School of Management, SUNY at Binghamton, Binghamton, the United States

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Plain Text BibTeX RIS

APA Style

Rong Guo, Kristian Rydqvist. (2021). The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. International Journal of Economics, Finance and Management Sciences, 9(6), 285-296. https://doi.org/10.11648/j.ijefm.20210906.19

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ACS Style

Rong Guo; Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int. J. Econ. Finance Manag. Sci. 2021, 9(6), 285-296. doi: 10.11648/j.ijefm.20210906.19

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AMA Style

Rong Guo, Kristian Rydqvist. The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker. Int J Econ Finance Manag Sci. 2021;9(6):285-296. doi: 10.11648/j.ijefm.20210906.19

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@article{10.11648/j.ijefm.20210906.19,
  author = {Rong Guo and Kristian Rydqvist},
  title = {The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {9},
  number = {6},
  pages = {285-296},
  doi = {10.11648/j.ijefm.20210906.19},
  url = {https://doi.org/10.11648/j.ijefm.20210906.19},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210906.19},
  abstract = {We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - The Stock Price Response to the Resolution of Stock Distributions, Order Imbalances, and the Market Maker
AU  - Rong Guo
AU  - Kristian Rydqvist
Y1  - 2021/12/31
PY  - 2021
N1  - https://doi.org/10.11648/j.ijefm.20210906.19
DO  - 10.11648/j.ijefm.20210906.19
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 285
EP  - 296
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20210906.19
AB  - We re-examine the abnormal stock return over the ex-right day of stock splits, stock dividends, and rights offers. The average abnormal stock return for stock splits equals 0.45%, for stock dividends equals 0.83%, and for rights offers equals 1.74%. These abnormal returns suggest that stock distributions incur handling costs that we refer to as nuisance. Regression analysis of the abnormal stock return on the bid-ask spread suggests that an underlying nuisance cost in the amount of 0.57% (across stock distribution types) of the stock price and a bid-ask bounce that occurs with a probability of 23% capture the essential cross-section (across stock distribution types) and time-series variation in the abnormal stock return. However, further analysis of the behavior of bid and ask quotes questions the bid-ask-bounce interpretation. Specifically, the bid-ask midpoint changes one-to-one with the changes in the bid and ask quotes, respectively, which suggests that market makers do not eliminate the nuisance cost from stock distributions. The nuisance cost of stock distributions decreases over time, and it vanishes entirely with high-frequency trading. Presumably, stock distributions are not nuisance for computers. With the development of the internet, share price management largely falls out of fashion, and stock distributions are no longer a concern.
VL  - 9
IS  - 6
ER  -

Copy | Download