Liquidity Spillovers: Evidence from Two-Step Spinoffs

How does an idiosyncratic shock to the liquidity of a stock affect the liquidity and prices of its related stocks? Utilizing the unique features of two-step spinoffs, we document strong evidence that the increased liquidity of spun-off firms spills over to their industry peers after the spinoffs. The liquidity spillovers across firms lead to value spillovers as well. The improved liquidity also induces larger institutional holdings in those stocks. The results provide support for the notion that the prices of spun-off firms provide additional public information about the related firms, thereby ameliorating information asymmetry in those firms.