Stock splits and fractional stock trading

In this post I discuss persistence in the popularity of stock splits.

A recent article (here) pointed out that the stock splits remain a popular tool of management teams. In a Miller and Modigliani world, stock splits are a purely cosmetic event not changing the equity value of a company. However, in reality, stock splits are common. Although less common after the 2008-9 GFC as shown in the figure below:

Stock splits are motivated by arguments of liquidity (a lower stock price allows retail investors to trade the shares), or signalling (a stock split signals management’s belief in the continued growth of the company). This got me thinking about the introduction of fractional share trading popularized by platforms such as Robinhood, but now increasingly available on all other major share platforms. The ability of retail investors to trade a fraction of a share would seemingly reduce one of the motivations of stock splits. This leads to the empirical question, is the introduction of fractional stock trading associated with a decrease in the incidence of stock splits?

As the time-series figure above highlights, this may be difficult to measure in a time-series without a clear exogenous shock. Fractional share trading was first introduced by Robinhood in December 2019, and has gradually been expanded to other platforms. So if not all investors have access to fractional trading, stock splits may still make sense for investors without access to this. Additionally, there maybe other factors related to the business cycle which drive the time series variation in stock splits.

An alternative means of identification could be to exploit the cross-section of countries, as different countries gradually introduce fractional share trading over time. This staggered treatment, could then be used to compare the incidence of stock splits in treated and non-treated countries in the years after introduction in a D-i-D setting.

This raises a further question, if we observe the continued incidence of stock splits in the years after fractional trading is introduced, what other friction/market imperfection could explain the persistence of stock splits? I leave it to future empirical researchers to explore this question.