Department/School
Accounting
Date of this version
2009
Document Type
Article
Keywords
stock splits, trading continuity, liquidity risk, cost of equity capital
DOI
https://doi.org/10.1016/j.jfineco.2008.09.008
Abstract
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.
Volume
93
Issue
3
Published in
Journal of Financial Economics
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Citation/Other Information
Lin, J., Singh, A. K., & Yu, W. (2009). Stock splits, trading continuity, and the cost of equity capital. Journal of Financial Economics, 93(3), 474-489. https://doi.org/10.1016/j.jfineco.2008.09.008