Impact of stock split announcements on stock prices and liquidity: Empirical evidence from India

Abstract

A stock split announcement is a corporate decision that splits the existing share into a number of shares by reducing its current face value. Basically stock splits are announced either to improve marketability of the share or to convey future profitability of the firm or to make trading in the shares attractive. The present study aims at investigating whether stock split is done in order to maintain the share prices within a normal price range and whether it improves the stock liquidity and also whether it signals any future prospects of the company. The study evaluates 20 splits announced by Nifty 200 companies between January 2012 and December 2015. Based on the results obtained through Event Study Methodology it was concluded that the companies split their shares to reduce the share price in order to make them more affordable and attractive for trading. Whereas the study neither shows any evidence for improvement of stock liquidity nor it indicates any signaling power of the split in the post-split announcement period.