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

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.