Stock Splits and Liquidity Risk in the Chinese Stock Market

Abstract

This paper examines the impact of stock splits on liquidity in the Chinese stock market. Liquidity can be generally described as the ability to trade large quantities of financial assets quickly at low cost with less price impact. For stock splits, managers have incentives to use it to attract more uninformed traders to participate in trading. More uninformed trading allows market makers to reduce their inventory holding costs and adverse information cost, leading to lower trading costs and liquidity improvement. Using a GAM model, we find that stock splits positively affect stock liquidity between 1996 and 2013 in China.