1 Discussion on Stock Splits, Trading Continuity, and the Cost of Equity Capital By Ji-Chai Lin, Ajar K. Singh, and Wen Wu Discussant K.C. John Wei HKUST

2 Summary The authors propose the trading continuity improvement hypothesis to explain firms’ stock split decisions Prediction of the hypothesis: –Stock splits improve liquidity in terms of greater trading continuity, especially for very illiquity stocks – Split factors are related to pre-split liquidity, especially for very illiquity stocks –Stock splits reduce liquidity risk –Stock splits lower the cost of equity capital –Split announcement returns are positively related to the improvements in both the liquidity level and liquidity risk

3 Summary The empirical results are consistent with the predictions of the trading continuity improvement hypothesis. –Stock splits improve liquidity in terms of greater trading continuity, especially for very illiquity stocks – Split factors are related to pre-split liquidity, especially for very illiquity stocks –Stock splits reduce liquidity risk, especially for liquity stocks –Stock splits lower the cost of equity capital –Split announcement returns are positively related to the improvements in both the liquidity level and liquidity risk

4 Contributions What is the paper about? –Proposal an alternative explanation for the mixed findings about the effect of stock splits on the improvement of stocks’ liquidity –Based on Liu’s (JFE, 2006) liquidity measure. Is the issue interesting? –Yes. What is new about the paper –Using the new alternative measure of liquidity proposed by Liu, the paper documents empirical findings that are consistent with their trading continuity improvement hypothesis

5 Comments Since the paper has been accepted publication at JFE, it has been gone through several rounds of R and R. They must have dealt with all the critical comments from the tough referee. Therefore, I have only two comment on the paper. The matched firms may not really matched. It is suggested that in addition to match firm price, size and B/M, it also matches PreLM12, since PreLM12 of split firms starts to decline long before stock splits. For split firms, since PreLM12 continues to decline starting 2 years before splits and stays at about the same level after split announcements, a time-varying liquidity beta should be a more appropriate way to proxy for liquidity risk before splits.

6 Some thoughts Since my two comments are too minor, it seems that I do not do a good job as a discussant. Therefore, I would like to offer a couple of thoughts about the topics related to stock splits from the implications of the paper. –Since stock splits lower the cost of capital, does it suggest that firm will invest more? –Since the liquidity is improved after stock splits, does it suggest that the stock prices are more informative? If yes, does corporate investment is more responsive to their stock prices?

7 Comments –Do stock splits improve or reduce corporate governance, transparency, or disclosure? –Do stock splits also lower the cost of debt? –Do stock splits affect external financing or capital structure? –Do stock splits affect firms’ fundamentals, such as cash flow?

8 Conclusion Overall, it is a very interesting paper that addresses the debate about whether stock splits improve liquidity. The empirical results are consistent with their proposed trading continuity improvement hypothesis. The paper is well written and well executed. I enjoyed reading the paper and encourage you to read the paper. Thank you!!!