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The Permanent and Temporary Effects of Stock Splits on Liquidity in a Dynamic Semiparametric Model

Author

Listed:
  • Hafner, Christian M.

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Linton, Oliver B.
  • Wang, Linqi

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. We use this methodology to study the impact of forward and reverse stock splits on the illiquidity dynamics of the S&P 500, S&P 400, and S&P 600 index stock constituents. 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.

Suggested Citation

  • Hafner, Christian M. & Linton, Oliver B. & Wang, Linqi, 2026. "The Permanent and Temporary Effects of Stock Splits on Liquidity in a Dynamic Semiparametric Model," LIDAM Reprints ISBA 2026006, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2026006
    DOI: https://doi.org/10.1080/07350015.2025.2551246
    Note: In: Journal of Business & Economic Statistics, 2026
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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