Do Stock Splits Improve Liquidity?

39 Pages Posted: 4 Mar 2005  

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Andrey Ukhov

Cornell University

Date Written: February 2006

Abstract

The prior literature finds that stock splits worsen liquidity, as measured by percent effective spread, over a short horizon (60 to 180 days) after the split. We innovate by examining a long-horizon window after the split and by using new proxies for percent spread constructed from daily data. This allows us to track the liquidity of thousands of stock splits taking place from 1963 through 2003. We find that both the percent spread of NASDAQ split firms and the spread proxies of NYSE/AMEX split firms temporarily increase, but return to even with the control firms in 5 to 12 months. This is our first result. This result provides a missing link supporting the signaling theory of splits. We also establish a second result. We find that split firms are experiencing gains in liquidity at longer horizons. The percent spread of NASDAQ split firms becomes significantly lower than that of the control firms in 12 to 39 months. The spread proxies for NYSE/AMEX split firms become lower than the spreads for the control firms in 12 to 24 months. The NYSE/AMEX results are robust to three different liquidity proxies. This suggests a net benefit of splitting, which provides a missing link supporting both the trading range theory and the optimal tick size theory. All three theories could be true at the same time and our findings provide new evidence supporting all three theories.

Suggested Citation

Goyenko, Ruslan and Holden, Craig W. and Ukhov, Andrey, Do Stock Splits Improve Liquidity? (February 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=675923 or http://dx.doi.org/10.2139/ssrn.675923

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Andrey Ukhov

Cornell University ( email )

Ithaca, NY 14853
United States

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