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Market Structure and Stock Splits

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Author Info
David Michayluk (School of Finance and Economics, University of Technology, Sydney)
Paul Kofman (Department of Finance, University of Melbourne)

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Abstract

Enhanced liquidity is one possible motivation for stock splits but empirical research frequently documents declines in liquidity following stock splits. Despite almost thirty years of inquiry, little is known about all the changes in a stock's trading activity following a stock split. We examine how liquidity measures change around more than 2,500 stock splits and find a pervasive decline in most measures. Large stock splits exhibit a more severe liquidity decline than small stock splits, especially on Nasdaq. We also examine a longer time period around stock splits and find that the differences between small and large stocks may be short-lived. Following the 1997 changes in order handling rules and reduction in tick size, liquidity declines following stock splits continue, however, the declines are not as severe on Nasdaq, suggesting the change in order handling rules may have been effective.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 62.

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Date of creation: 01 Jul 2001
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Handle: RePEc:uts:rpaper:62

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