Stock splits, trading continuity, and the cost of equity capital☆

By Ji‐Chai Lin, Ashutosh Kumar Singh, Wen Yu. 2009

136 citations recorded by the source corpus.

We hypothesize that managers use stock splits to attract more uninformed trading so that market makers can provide liquidity services at lower costs, thereby increasing investors' trading propensity and improving liquidity. We examine a large sample of stock splits and find that, consistent with our hypothesis, the incidence of no trading decreases and liquidity risk is lower following splits, implying a decline in latent trading costs and a reduced cost of equity capital. Further, split announcement returns are correlated with the improvements in both liquidity levels and liquidity risk. Our analysis suggests nontrivial economic benefits from liquidity improvements, with less liquid firms benefiting more from stock splits.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/eb61d697435c54281f5a59aaf40a0ca0d28f2feb

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Citations in the corpus

Liquidity Shocks and Stock Market Reactions (2014, background): “Muscarella and Vetsuypens (1996), Schultz (2000) and Lin, Singh, and Yu (2009) find that there has been considerable increases in trading volume and reduction in liquidity risk subsequent to stock splits.”
The Role of Stock Liquidity in Executive Compensation (2012, background): “<INSERT FIGURE 2 ABOUT HERE> Consistent with the findings from recent studies (e.g., Maloney and Mulherin 1992; Lin et al. 2009), Panel A of Figure 2 shows a significant increase in stock liquidity in the 3 years after stock splits relative to the 3 years before after deleting the year of the split.”