Abstract
How does an idiosyncratic shock to stock liquidity affect liquidity and efficiency in the markets for related stocks? Utilizing the unique feature that the second stage of a two-step spinoff greatly increases the free float of a public firm, we document strong evidence that the enhanced liquidity of spun-off firms spills over to their industry peers, increasing their liquidity. The improved liquidity induces greater pricing efficiency and larger institutional holdings in these stocks. Liquidity spillovers also lead to positive valuation spillovers. Our results concerning liquidity externality and its consequences have important implications for policymakers, regulators, and firm managers.
| Original language | English |
|---|---|
| Article number | 101000 |
| Journal | Journal of Financial Markets |
| Volume | 76 |
| DOIs | |
| State | Published - Nov 2025 |
Keywords
- Idiosyncratic shock
- Information efficiency of prices
- Institutional holdings
- Lee-ready and Holden-Jacobsen algorithms
- Liquidity spillovers
- Spillovers in valuation
- Two-step spinoffs
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