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

Title A Study on the Liquidity Effect of Stock Splits in Indian Stock Markets
Author Mihir Dash, Amaresh Gouda
Years 2005

 

Theoretical Basis The literature has investigated several interesting effects associated with stocksplits. Most of the literature, however, is based on event study methodology, and the findings from the studies tend to be mixed, and often contradictory. Also, very few studies considered the longer-term effects of stock-splits. 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. 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.
Methods and Subjects The data used for the study was collected from twenty-four stock-splits for stocks listed on the National Stock Exchange (NSE), Mumbai, India which took place in the period Jan. 2006 – Aug. 2007. The sample stocks were all core NIFTY-50 stocks. To avoid abnormal returns due to the announcement and execution of the split, a fifteen-day window was taken prior to the announcement of the split and after the execution of the split.
Main Result
  1. The mean and variance of returns of the sample stocks in the forty-five-day period prior to the pre-announcement window and in the forty-five-day period after the postexecution window

Cross-sectional analysis using the paired-samples t-test also showed a significant decrease in mean returns and a significant increase in standard deviation of returns after the split.

  1. The drift and volatility parameters of the sample stocks in the forty-five-day period prior to the pre-announcement window and in the forty-five-day period after the postexecution window

Cross-sectional analysis using the paired-samples t-test also showed a significant decrease in mean drift parameter and a significant increase in volatility parameter after the split

Conclusion At the outset, two immediate observations can be made. Firstly, the sample stocks considered for the study were stocks of quite well-known companies; thus, the “neglected firm” hypothesis would not seem to apply in general. Secondly, the split ratio of the sample stocks was found to be very high. The “trading range” hypothesis would imply that stock splits would take place once the stock price exceeded the optimal trading range, so that the split ratio would be relatively low, say about 2:1. The observed split ratios in the sample suggest that the “trading range” hypothesis would not seem to apply.

 

Iklan

Tinggalkan Balasan

Isikan data di bawah atau klik salah satu ikon untuk log in:

Logo WordPress.com

You are commenting using your WordPress.com account. Logout / Ubah )

Gambar Twitter

You are commenting using your Twitter account. Logout / Ubah )

Foto Facebook

You are commenting using your Facebook account. Logout / Ubah )

Foto Google+

You are commenting using your Google+ account. Logout / Ubah )

Connecting to %s