Why We Were Wrong About Stock Splits

Robert Battalio

EXCERPT:

We spoke to two of the authors of the paper, Robert Battalio, a professor at Notre Dame’s Mendoza College of Business, and Robert Jennings, professor emeritus  at Indiana University’s Kelley School of Business, by phone last month. (The third co-author is Shane Corwin, also of the Mendoza College of Business.) “The general notion that stock splits are totally irrelevant — that’s what we wanted to push back on,” they told us.

Their paper’s summary details the problem:

The exclusion of odd lot orders from the protected NBBO [National Best Bid and Offer] quote produces cases where trades fill at prices worse than available opposite-side trading interests. This problem is exacerbated by the rise in stock prices caused by the post-crisis reluctance of firms to use stock splits.

Or as Batallio and Jennings told us, for high-priced stocks, “The big takeaway is that there are likely better prices out there that you don’t see.” But good or bad, “There’s not much the retail investor can do about it, though.”

Read the entire story on the Motley Fool website.