How Does Split Announcement Affect Stock Liquidity? Evidence from Bursa Malaysia

Abstract

This study examines the impact of stock splits on stock liquidity in Bursa Malaysia from 2004–2018. The study uses event study methodology and investigates liquidity changes, the role of liquidity, and the relationship between abnormal returns and liquidity as well. We found a significant liquidity improvement on the splits announcement, announcement of book closing date and split execution date (Ex-date), while it declined after the split Ex-date. The findings also indicate that firms with a low-level liquidity prior to split announcements experienced an increase in liquidity after Ex-date. Using panel data analysis, we find that the fixed effect model is more appropriate than the pooled OLS, and the abnormal announcement returns are driven by stock liquidity.

Stock Split Rule Changes and Stock Liquidity: Evidence from Bursa Malaysia

“…Previous studies (Copeland 1979;Lakonishok and Lev 1987;Huang et al 2013) report an increase in liquidity on split announcements, but this declines after the announcement. Consistent with previous studies, Tabibian et al (2020) (hereafter Tabibian et al 2020) find a decrease in liquidity following the split Ex-date that could be interpreted as stock splits not being effective in attracting new investors. On the other hand, most of the managers in Bursa Malaysia detail an expectation of liquidity improvement in split proposals.…”

“…As they provide evidence of an ambiguous market reaction on an Ann-BC day, we also test the impact of rule changes on liquidity around this event. Moreover, Tabibian et al (2020) find no stock liquidity improvement on the Ex-date and explain that the Ann-BC absorbs a part of the market reaction, which leads to an insignificant market reaction on the Ex-date. On the other hand, the SC changed the split rule of the par value from RM 0.10 to RM 0.5, which means firms with pre-split high prices will be allowed to implement a stock split.…”

“…However, Murphy and Thirumalai (2017) found that retail traders were attracted to the lower prices after stock splits on the National Stock Exchange of India (NSE). Studying Bursa Malaysia, Tabibian et al (2020) and Tabibian and Zhang (2018) report no significant abnormal returns or liquidity improvement after the Ex-date. On the other hand, in Bursa Malaysia, a majority (above 90%) of firms' managers believe in liquidity improvement following stock splits.…”

“…If the split rule changes were in line with the investors' viewpoint of stock split as good news, the liquidity improvement would be stronger in the third period than in the first and second periods. Meanwhile, Tabibian et al (2020) find that abnormal announcement returns are driven by an increase in liquidity. However, both studies provide evidence that shows a decline in liquidity after a split announcement as well as an insignificant market reaction on and after the Ex-date.…”

“…Meanwhile, following the changes and improvements in the regulations implemented by the Securities Commission (SC) in 2006 and 2009, Bursa Malaysia was evaluated by the IMF under the Financial Sector Assessment Programme (FSAP) and achieved the highest rank in 2013. The contradiction between managers' beliefs and the findings of the study by Tabibian et al (2020), in addition to the SC achievement, are a strong motivation to investigate liquidity behavior following stock split rule changes.…”