The effects of stock distributions on returns, volatility, and price

Jason E Heavilin, University of Texas at El Paso


This dissertation investigates three issues regarding the effects of stock distributions on returns, volatility, and prices in an attempt to answer the questions why firms execute stock distributions and why the market appears to favor them. These questions have occupied academicians for at least 40 years (i.e., Fama et al (1969), Ohlson and Penman (1985), Rankine and Stice (1997), Angel (1997), and Crawford et al (2005) among many others). Chapter 1 studies the notion that the stock market reacts more positive to stock dividends than to stock splits (Rankine and Stice, 1997). However, I find that the stock market does not differentiate between stock splits and stock dividends. Although, I do find some differences in announcement returns, depending on which state the firm that announces a distribution is located in. Specifically, firms located in states where there are restrictions on cash dividends (i.e., dividend can only be paid from retained earnings) exhibit differences in announcement returns consistent with the retained earnings hypothesis. Chapter 2 investigates volatility increases that are observed after the execution of a stock distribution (Ohlson and Penman, 1985). I show that the increase in volatility appears to be caused by the relationship between the price and bid-ask bounce effects associated with minimum tick size. Chapter 3 studies the prediction made by Angel (1997) that average stock prices will decrease over time due to decreases in minimum tick size, which promotes execution of stock distributions. I show that this prediction has not come true, yet. Moreover, I find the average stock price has increased (not decreased) while the stock distribution frequency has decreased.

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Recommended Citation

Heavilin, Jason E, "The effects of stock distributions on returns, volatility, and price" (2015). ETD Collection for University of Texas, El Paso. AAI3708543.