Market Microstructure and the Ex-Date Return

Abstract

This article examines the role of measurement biases, due to order flow effects, in abnormal split ex-day returns. We conjecture that postsplit orders consist of numerous small buyers and fewer larger sellers. This change in order flow causes closing prices to occur more frequently at the ask price, consistent withMaloney and Mulherin (1992)andGrinblatt and Keim (1991). In addition, this change causes specialists' spreads to increase, perhaps to offset larger average inventories. We examine both NYSE and NASDAQ samples and find that order flow biases can explain approximately 80 percent (48 percent) of the NYSE (NASDAQ) ex-day return.