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The Effect of Stock Splits on Liquidity in a Dynamic Model

Author

Listed:
  • Hafner, C. M.
  • Linton, O. B.
  • Wang, L.

Abstract

We develop a dynamic framework to detect the occurrence of permanent and transitory breaks in the illiquidity process. We propose various tests that can be applied separately to individual events and can be aggregated across different events over time for a given firm or across different firms. In an empirical study, we use this methodology to study the impact of stock splits on the illiquidity dynamics of the Dow Jones index constituents and the effects of reverse splits using stocks from the S&P 500, S&P 400 and S&P 600 indices. Our empirical results show that stock splits have a positive and significant effect on the permanent component of the illiquidity process while a majority of the stocks engaging in reverse splits experience an improvement in liquidity conditions.

Suggested Citation

  • Hafner, C. M. & Linton, O. B. & Wang, L., 2024. "The Effect of Stock Splits on Liquidity in a Dynamic Model," Cambridge Working Papers in Economics 2410, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2410
    Note: obl20, lw711
    as

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    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    3. Lin, Ji-Chai & Singh, Ajai K. & Yu, Wen, 2009. "Stock splits, trading continuity, and the cost of equity capital," Journal of Financial Economics, Elsevier, vol. 93(3), pages 474-489, September.
    4. Escanciano, J. Carlos, 2010. "Asymptotic Distribution-Free Diagnostic Tests For Heteroskedastic Time Series Models," Econometric Theory, Cambridge University Press, vol. 26(3), pages 744-773, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Amihud illiquidity; Difference in Difference; Event Study; Nonparametric Estimation; Reverse Split; Structural Change;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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