The effects of stock splits and reverse splits on market quality : the case of Hong Kong stock market
股票分拆與反向分拆對市場質量的影響 : 香港股票市塲的個案
Student thesis: Doctoral Thesis
Related Research Unit(s)
In this study the effects of stock splits and reverse splits on some aspects of market quality in the Hong Kong stock market are investigated: liquidity, volatility, and trading activity. In addition, the association between the change in liquidity (volatility) and the change in trading activity is considered. The results show that the market liquidity is enhanced after forward splits when liquidity is measured with trading volume and depth, and that the market liquidity declines after reverse splits according to trading volume, depth, and relative bid-ask spread. Moreover, the liquidity improvement produced by forward splits is mostly contributed to the small trades when total trades are classified into small trades and large trades. Small trades experience significant improvement in trading activity after forward splits while large trades do not. This supports the liquidity hypothesis in the viewpoint that stock splits enhance shareholder base, and is also consistent with the tick size hypothesis which states that stock splits make the stock more attractive to small investors. In contrast, the liquidity decline induced by reverse splits is contributed to the decline in trading activity of both small trades and large trades after reverse splits. The results imply that reverse splits do not bring liquidity benefits and that the main motivation to reverse split is to raise the stock price artificially. On the other hand, the stock return volatility increases following forward splits, and decreases following reverse splits regardless of what kind of return is used to measure volatility, which is consistent with the previous empirical studies. The change in volatility can not be attributed to bid-ask spread or price discreteness. Instead, the volatility increase after forward splits is attributed to the change in the number of small trades, while the volatility decrease after reverse splits is attributed to the change in the number of total trades.
- Stock exchanges, Stock splitting, China, Hong Kong