Price and liquidity effects of stock splits on shares

Barasa, Sandra Akochi
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Strathmore University
Fama et al. ( 1969) defined a stock split as an exchange of shares in which at least five shares were distributed for every four formerly outstanding, which means that shareholders get additional shares for every share previously held. Nevertheless, given that splitting is not costless and the result is to multiply the number of shares per shareholder without increasing the shareholder's capital, why then do firms split their shares? This project questions the effects of stock splits with a focus on the price and the liquidity effects. The main objectives of the study were to determine the effect of stock splits on the price of the shares after the split announcement is made and to also determine the liquidity effects of stock splits in the stock market. The study used the event study methodology and the student t-statistic to test for price and liquidity effects on a sample of 7 listed companies from the Nairobi Securities Exchange, using historical prices and trading volume respectively. An event window of 81 days, including the day of announcement was used in the study. For price effects, the study concluded that stock splits cause an increase on the prices of shares as was evidenced by the 7 sampled firms. For liquidity, the findings were inclusive given the varying effects from the sampled firms. The main limitation for the study was the small sample size
Submitted in partial fulfillment of the requirements for the Degree of Bachelor of Business Science in Finance at Strathmore University
stock splits, price liquidity, Stock exchange