Settling Down: T+2 Settlement Cycle and Liquidity

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We examine the effects of a shortened settlement cycle on liquidity. Our difference-in-difference results show that securities listed on US stock exchanges become more liquid, relative to similarly matched securities listed on the London Stock Exchange, after the standard settlement cycle in the United States was reduced from T+3 to T+2. These results hold across various low- and high-frequency measures of liquidity and empirical model specifications. Furthermore, we find that securities that are more difficult-to-borrow experience the greatest gains in liquidity. Our findings might provide insights to regulators and exchange officials considering the adoption of a shortened settlement cycle.