Stock splits, trading continuity, and the cost of equity capital

Ji-chai Lin, Ajai K. Singh, Wen Yu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

47 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)474-489
Number of pages16
JournalJournal of Financial Economics
Volume93
Issue number3
DOIs
Publication statusPublished - 1 Sep 2009
Externally publishedYes

Keywords

  • Cost of equity capital
  • Liquidity risk
  • Stock splits
  • Trading continuity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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