Stock splits and institutional investors

Helen Bell Mason, Louisiana Tech University


The objective of this study is to examine the relationship between firm stock split behavior and institutional ownership. Previous studies do not address pre-split ownership effects on firm stock split behavior. The contribution of this dissertation research is to examine the relationship between institutional ownership and firm split behavior with a study group not exceeded in the literature. The relationships identified have important implications for management.

Compact Disclosure financial and institutional owner information and the Media General file provide the data. The study includes calendar years 1988-1993 and the first eight months of 1994. A total of 42,798 observations comprise the study group. The stock split group contains 2,777 observations with a control group of 40,021 observations.

Results of regression, ANOVA, ANCOVA, and correlation analyses indicate a positive relationship between split behavior and level of institutional ownership. Several variables proxy split behavior: a dichotomous measure, a categorical measure controlling for pre-split market price, and the actual par value adjustment factor (as reported in the data source). Two measures proxy institutional ownership: actual percentage of institutional ownership and quintile level of ownership. The study controls for any potential year effect and firm size.

Considering the increase in both number of stock splits and level of institutional owner holdings, the study identifies a positive relationship between pre-split institutional ownership and stock split propensity. A firm size effect magnifies the estimated relationship. Larger firms have higher percentages of pre-split institutional ownership and a greater propensity to approve stock splits than smaller firms (as measured by the natural log of total assets).

The implications are that institutional investors prefer firms that approve stock splits. These investors either encourage stock split behavior or have the ability to identify firms with stock split characteristics in the pre-split period or both. Institutions purchase shares in the pre-split period, holding the shares expecting increases in short-term and long-term earnings.