Stock Splits and Liquidity Risk in the Chinese Stock Market

35 Pages Posted: 12 Jan 2018

See all articles by May Hu

May Hu

Deakin University

Ameeta Jain

Deakin University - Faculty of Business and Law

Xinwei Zheng

Department of Finance

Date Written: January 11, 2018

Abstract

This paper examines the impact of stock splits on liquidity in the Chinese stock market. Liquidity can be generally described as the ability to trade large quantities of financial assets quickly at low cost with less price impact. For stock splits, managers have incentives to use it to attract more uninformed traders to participate in trading. More uninformed trading allows market makers to reduce their inventory holding costs and adverse information cost, leading to lower trading costs and liquidity improvement. Using a GAM model, we find that stock splits positively affect stock liquidity between 1996 and 2013 in China.

Keywords: Stock Splits; Liquidity; Chinese stock market

JEL Classification: G12; G14; G34

Suggested Citation

Hu, May and Jain, Ameeta and Zheng, Xinwei, Stock Splits and Liquidity Risk in the Chinese Stock Market (January 11, 2018). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, Available at SSRN: https://ssrn.com/abstract=3100600 or http://dx.doi.org/10.2139/ssrn.3100600

May Hu

Deakin University ( email )

Graduate School of Business
Melbourne, Victoria 3125
Australia

Ameeta Jain

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Xinwei Zheng (Contact Author)

Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

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