THE EFFECTS OF REVERSE SPLITS ON THE LIQUIDITY OF THE STOCK

This study investigates the liquidity effects of reverse stock splits using bid-ask spread, trading volume, and the number of nontrading day s as proxies for the liquidity of the stock. Results indicate a decrea se in bid-ask spread and an increase in trading volume after reverse s plits. More importantly, the number of nontrading days significantly d eclines following reverse splits. For the control group, however, no s uch changes are observed. These results suggest that reverse splits en hance the liquidity of the stock.