Nor Elliany Hawa Ibrahim1 , Kamarun Nisham Taufil Mohd1 & Karren Lee-Hwei Khaw 2
1School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia.
2Faculty of Business and Accountancy, University of Malaya, Malaysia.
Abstract: Research question: This study examines the liquidity reaction surrounding the standardization of trading board lot (STBL) event that was announced and implemented in 2003. Motivation: The STBL event called for a reduction in the trading lot size from 1000 and 200 units per lot to a uniform size of 100 units per lot. The event that affected 98% of Malaysian listed firms is claimed to have improved the market liquidity and increased trading activities. Hence, this study is motivated to examine the claim. Idea: Specifically, this study examines the liquidity effect surrounding the event announcement and implementation dates. We hypothesize that the STBL event has significant impact on market liquidity. Data: We have a sample of 869 firms. February 5, 2013 is taken as the event announcement date. Since the STBL was implemented in three phases, we have three implementation dates that affected different groups of firms. Method/Tools: To begin with, this study examines the liquidity effect using an event study methodology, followed by cross-sectional regression analyses. Liquidity is measured by (1) volume turnover, (2) bid-ask spread, and (3) Amihud illiquidity ratio to gauge the impact of the new policy on the market. Findings: There is a significant liquidity deterioration following the announcement of STBL due to the lack of information content. However, the implementation leads to significantly higher volume turnover in the first stage, while the bid-ask spread is significantly narrower in the second stage. In the last stage, we find significant improvement in all three liquidity measures. This is driven by an optimistic market outlook inspired by the positive liquidity effects observed in the earlier stages. Contribution: The findings confirm the significantly higher trading activities after the implementations of STBL, which further contribute to the limited literature on the minimum trading unit. The reduction of trading lot size leads to greater trading volumes. Lastly, the outcome of this study can be used as a reference for the regulators in evaluating the effectiveness of current policies or formulating future regulations.