Hafner, C. M., Linton, O. B., Wang, L.
The Effect of Stock Splits on Liquidity in a Dynamic Model
JIWP Number: 2404
Abstract: We develop a dynamic framework to detect the occurrence of permanent and transitory breaks in the illiquidity process. We propose various tests that can be applied separately to individual events and can be aggregated across different events over time for a given firm or across different firms. In an empirical study, we use this methodology to study the impact of stock splits on the illiquidity dynamics of the Dow Jones index constituents and the effects of reverse splits using stocks from the S&P 500, S&P 400 and S&P 600 indices. Our empirical results show that stock splits have a positive and significant effect on the permanent component of the illiquidity process while a majority of the stocks engaging in reverse splits experience an improvement in liquidity conditions.
Keywords: Amihud illiquidity, Difference in Difference, Event Study, Nonparametric Estimation, Reverse Split, Structural Change
JEL Codes: C12 C14 G14 G32
Author links: Oliver Linton Linqi Wang
PDF: jiwp2404.pdf 
Open Access Link: 10.17863/CAM.107457
