STOCK SPLITS IN SRI LANKA: VALUATION EFFECTS & MARKET LIQUIDITY

Abstract

Stock splits are a relatively new phenomenon in Sri Lankan market, especially since 2007 with the new companies Act. This paper examines the response of the market to the announcement of, and the rationale for stock split announcements. Researchers used the entirety of splits during the period from 2007 to 2010, which counts up to forty (40) stock splits by companies listed in the Colombo Stock Exchange in order to examine the market response. The study employed the standard event study method and cross-sectional regression analysis in measuring the impact of signalling on market liquidity. The empirical results provide strong evidence consistent with similar studies in other markets. It supports the liquidity hypothesis; the study finds that stock split announcements create significant positive market reaction. The size of the split is positively related to the abnormal returns. These findings indicate that the market perceives the split announcement as a positive signal about the company irrespective of the prevailing conditions of the firm and the purpose of the split or future expectations about the firm. The observed sharp-adjustments in the stock prices on the day of announcement suggest that the market is informationally efficient. The stock’s trading volume is improved significantly with the split announcement; the liquidity hypothesis explains sufficiently the rationale for stock splits by companies in
Sri Lanka.

Key Words: Stocks, Splits, Liquidity

for full paper : fmscresearch@sjp.ac.lk