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