A Study on the Liquidity Effects of Stock Splits in Indian Stock Markets

Abstract

Stock splits are a relatively new phenomenon in Indian markets, especially since early 2005 with the bull phase in Indian stock markets, with many companies’ stock prices shooting far beyond the normal trading range. Though stock splits do not change the market capitalization of a company’s stock, several studies have reported abnormal returns around the announcement date as well as the execution date, and an increase in variance after the execution date. The objective of the study is to analyze the overall impact of stock splits on returns. To do so, the returns in the period prior to the announcement are compared with the returns after the execution of the split, in terms of mean returns and variance of returns. The results of the study indicate strong evidence for an increase in the liquidity of the stock after the split.