Share Liquidity and Market Microstructure Reform: The Case of Screen-based Trading in Mumbai

We investigate the impact of the March 1995 move to screen‐based trading on the Mumbai Stock Exchange, using separate samples of more liquid (A) and less liquid (B) shares. Following the move, the average cumulative abnormal return for A shares was 4.5%, whereas that for B shares was over 12%; market liquidity and efficiency increased but the effect on volatility was more ambiguous. We identify a significant cross‐sectional relationship between the size of cumulative abnormal returns and firm‐specific improvements in liquidity, efficiency, and volatility, with differences in the effects of reform on A and B shares.