Institutional Investors and the Information Production Theory of Stock Splits

We make use of a large sample of transaction-level institutional trading data to test an extended version of Brennan and Hughes' (1991) information production theory of stock splits. We compare brokerage commissions paid by institutional investors before and after a split, assess the private information held by them, and relate the informativeness of their trading to brokerage commissions paid. We show that institutions make abnormal profits net of brokerage commissions by trading in splitting stocks. We also show that the information asymmetry faced by firms goes down after stock splits. Overall, our empirical results support the information production theory.