Stock Splits: A Reevaluation

Abstract

In theory, stocks splits do not affect a firm’s aggregate market value. Yet, firms often split their stocks to keep the price in a desired trading range and, perhaps, to make the stock more affordable to individual investors. Past studies have been inconclusive about whether shareholder returns are affected and whether the effects, if any, are due to affordability or signaling. Using fresh data, all since the decimalization of prices, the author finds positive effects on shareholder returns, but not because splits make stocks more affordable. The more compelling argument is that corporate stock splits signal a board’s confidence in the company’s prospects. For exchange-traded funds and other funds, there is little evidence that shareholders benefit from splits or are more attracted to funds after they split.

TOPICS: Security analysis and valuation, indexing exchange-tradedperformance measurement