Abstract
This study examines the impact of stock splits on stock liquidity in Bursa Malaysia from 2004–2018. The study uses event study methodology and investigates liquidity changes, the role of liquidity, and the relationship between abnormal returns and liquidity as well. We found a significant liquidity improvement on the splits announcement, announcement of book closing date and split execution date (Ex-date), while it declined after the split Ex-date. The findings also indicate that firms with a low-level liquidity prior to split announcements experienced an increase in liquidity after Ex-date. Using panel data analysis, we find that the fixed effect model is more appropriate than the pooled OLS, and the abnormal announcement returns are driven by stock liquidity.
Highlights
Stock splits are still a puzzling and unsolved corporate phenomenon
Our results suggest that liquidity improvement is a short-lived phenomenon, as there is a decline in liquidity in a year period after execution date (Ex-date)
The results from our robustness tests indicate that firms with a low-level liquidity experience a significant increase in stock liquidity after Ex-date, while there is a significant decline in liquidity for medium- and high-level groups
Summary
Stock splits are still a puzzling and unsolved corporate phenomenon. Financial economists theoretically consider stock splits as a seemingly cosmetic accounting change which have no real effect on firms’ cash flows and fundamentals, but are often associated with positive announcement returns (Fama et al 1969; Grinblatt et al 1984). Managers believe that stock split improves stock liquidity. Above 90% of the managers in Bursa Malaysia document on split proposals that liquidity improvement is the main rationale for splitting their stock. There are contradictory results to stock liquidity improvement. The first empirical study in this area by Copeland (1979) found that stock liquidity permanently decreases in the year after stock splits.
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