Skip to main content
SpringerLink
Log in

The effects of stock splits on stock liquidity

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

This study examines the effects of stock splits on stock liquidity. We find that most liquidity measures increase substantially around the stock split announcement. After the announcement date, split firms’ liquidity declines, but is still above the pre-split level. However, after the ex-date, the liquidity drops below the pre-split level. Thus, the impact of stock splits on stock liquidity appears to be short-lived. We also find that the change in liquidity can significantly explain the announcement effect, but not the ex-date effect. Overall, our results seem to be more consistent with the signaling hypothesis and/or the attention-grabbing hypothesis than with the improved liquidity hypothesis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Gray, Smith, and Whaley find that trading costs increase following stock splits. The higher trading costs are equivalent to excess profits for market makers. Similarly, Kadapakkam et al. (2005) find that the increase in relative spread provides incentives for brokers to promote splitting stocks to small investors.

  2. Goyenko et al. (2006) examine whether liquidity changes after splits in both short- and long-run. However, they focus on monthly liquidity measures and skip the announcement month in their analysis.

  3. Angel (1997) argues that stock splits are undertaken in order to move the tick size relative to the stock price to a desired level. Angel’s idea is that a large tick size provides market making firms additional incentives to promote the split stock to small investors. Schultz (2000) finds that there are a lot of small orders, but not large orders, subsequent to stock splits, which is consistent with Angel’s broker promotion argument.

  4. The market-adjusted return is the return difference between a split firm and the CRSP equally-weighted index.

  5. However, the median return is statistically insignificant.

  6. All Amihud illiquidity ratios have been multiplied by 106.

  7. Lin et al. (2009) also find a decrease in the incidence of no trading after stock split announcements. However, they do not examine the liquidity effect between the announcement date and the ex-date and hence it is not clear whether the improvement in liquidity is a short- or long-term phenomenon.

  8. Note that our estimate of dollar spread is closely related to the minimum tick size. The minimum tick size reduced from $1/8 to $1/16 on June 24, 1997 on NYSE/AMEX and on June 2, 1997 on NASDAQ, and further to $0.01 on January 29, 2001 on NYSE/AMEX and on April 9, 2001 on NASDAQ. Thus, we calculate the dollar and relative spreads only if the two-year interval from AD−252 to ED+260 falls into one of the three minimum tick size regimes.

  9. Similar results are obtained when other liquidity measures are used and hence are not reported to save space.

  10. Hodrick (1999) suggests that return volatility is a good measure of the stock price elasticity of demand (defined as the percentage change in quantity demanded given a percentage change in price). He finds that higher return volatility is associated with higher elasticity.

References

  • Amihud Y (2002) Illiquidity and stock returns: cross-section and time-series effects. J Financ Mark 5:31–56

    Article  Google Scholar 

  • Angel JJ (1997) Tick size, share prices and stock splits. J Financ 52:655–681

    Article  Google Scholar 

  • Anshuman VR, Kalay A (2002) Can splits create market liquidity? Theory and evidence. J Financ Mark 5:83–125

    Article  Google Scholar 

  • Baker HK, Gallagher PL (1980) Management’s view of stock splits. Financ Manag 9:73–77

    Article  Google Scholar 

  • Baker HK, Powell GE (1992) Why companies issue stock splits. Financ Manag 21:11

    Article  Google Scholar 

  • Banerjee S, Gatchev VA, Spindt PA (2007) Stock market liquidity and firm dividend policy. J Financ Quant Anal 42:369–398

    Article  Google Scholar 

  • Barber BM, Odean T (2008) All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. Rev Financ Stud 21:785–818

    Article  Google Scholar 

  • Boehme RD, Danielsen BR (2007) Stock-split post-announcement returns: underreaction or market friction? Financ Rev 42:485–506

    Article  Google Scholar 

  • Brennan MJ, Copeland TE (1988) Stock splits, stock prices, and transaction costs. J Financ Econ 22:83–101

    Article  Google Scholar 

  • Brennan MJ, Hughes PJ (1991) Stock prices and the supply of information. J Financ 46:1665–1691

    Article  Google Scholar 

  • Conroy JS, Harris RS, Benet BA (1990) The effects of stock splits on bid-ask spreads. J Financ 45:1285–1295

    Article  Google Scholar 

  • Copeland TE (1979) Liquidity changes following stock splits. J Financ 34:115–141

    Article  Google Scholar 

  • Datar VT, Naik NY, Radcliffe R (1998) Liquidity and stock returns: an alternative test. J Financ Mark 1:203–219

    Article  Google Scholar 

  • Desai AS, Nimalendran M, Venkataraman S (1998) Changes in trading activity following stock splits and their effect on volatility and the adverse-information component of the bid-ask spread. J Financ Res 21:159–183

    Article  Google Scholar 

  • Dhar R, Goetzmann WN, Shepherd S, Zhu N (2004) “The impact of clientele changes: Evidence from stock splits,” Working Paper, Yale University

  • Easley D, O’Hara M, Saar G (2001) How stock splits affect trading: a microstructure approach. J Financ Quant Anal 36:25–51

    Article  Google Scholar 

  • Goyenko RY, Holden CW, Ukhov AD (2006) “Do stock splits improve liquidity?” Working Paper, Indiana University

  • Goyenko RY, Holden CW, Trzcinka CA (2009) Do liquidity measures measure liquidity? J Financ Econ 92:153–181

    Article  Google Scholar 

  • Gray SF, Smith T, Whaley RE (2003) Stock splits: implications for investor trading costs. J Empir Finan 10:271–303

    Article  Google Scholar 

  • Grinblatt MS, Masulis RW, Titman S (1984) The valuation effects of stock splits and stock dividends. J Financ Econ 13:461–490

    Article  Google Scholar 

  • Hodrick LS (1999) Does stock price elasticity affect corporate financial decisions? J Financ Econ 52:225–256

    Article  Google Scholar 

  • Holden CW (2009) New low-frequency spread measures. J Financ Mark 12:778–813

    Article  Google Scholar 

  • Kadapakkam P-R, Krishnamurthy S, Tse Y (2005) Stock splits, broker promotion, and decimalization. J Financ Quant Anal 40:873–895

    Article  Google Scholar 

  • Kyle AS (1985) Continuous auctions and insider trading. Econometrica 53:1315–1335

    Article  Google Scholar 

  • Lakonishok J, Lev B (1987) Stock splits and stock dividends: why, who, and when. J Financ 42:913–932

    Article  Google Scholar 

  • Lamoureux CG, Poon P (1987) The market reaction to stock splits. J Financ 42:1347–1370

    Article  Google Scholar 

  • Lesmond DA, Ogden JP, Trzcinka CA (1999) A new estimate of transaction costs. Rev Financ Stud 12:1113–1141

    Article  Google Scholar 

  • Lin J-C, Singh AK, Yu W (2009) Stock splits, trading continuity, and the cost of equity capital. J Financ Econ 93:474–489

    Article  Google Scholar 

  • McNichols M, Dravid A (1990) Stock dividends, stock splits, and signaling. J Financ 45:857–879

    Article  Google Scholar 

  • Muscarella C, Vetsuypens M (1996) Stock splits: signaling or liquidity? The case of ADR ‘solo splits’. J Financ Econ 42:3–26

    Article  Google Scholar 

  • Nayar N, Rozeff MS (2001) Record date, when issued and ex date effects in stock splits. J Financ Quant Anal 36:119–139

    Article  Google Scholar 

  • Powell GE, Baker HK (1993/1994) The effects of stock splits on the ownership mix of a firm. Rev Financ Econ 3:70–88

    Google Scholar 

  • Schultz P (2000) Stock splits, tick size, and sponsorship. J Financ 55:429–450

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Accounting and Finance, Alabama State University, Montgomery, AL, 36101-0271, USA

    Gow-Cheng Huang

  2. Department of Finance and Economics, Mississippi State University, Mississippi State, MS, 39762, USA

    Kartono Liano

  3. Department of Finance and Supply Chain Management, Shippensburg University, Shippensburg, PA, 17257, USA

    Ming-Shiun Pan

Authors
  1. Gow-Cheng Huang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Kartono Liano
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ming-Shiun Pan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Kartono Liano.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Huang, GC., Liano, K. & Pan, MS. The effects of stock splits on stock liquidity. J Econ Finan 39, 119–135 (2015). https://doi.org/10.1007/s12197-013-9250-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-013-9250-6

Keywords

JEL Classifications

Search

Navigation