Management's View of Stock Splits

Abstract

* In theory, a stock split is merely an arithmetic exercise. That is, a stock split results in a reduction of the par value and a consequent increase in the number of shares proportionate to the split. All other capital accounts remain unchanged. Theoretically, shareholders receive no tangible benefits from a stock split, while there are some costs associated with it. In practice, corporate managers may view stock splits as more than an arithmetic exercise and may have other reasons for issuing them. One controversial issue is the impact of stock splits on the market price of common stock. Some managers familiar with early research may believe that stock splits alone cause an increase in total market value for the shares outstanding [7, 8]. Others may be familiar with more recent studies which show that, while stock prices are not significantly affected by stock splits per se, they may respond to information about other fundamental variables implied by the split, such as an increase in the cash dividend [5, 6, 9]. Still others may believe non-price benefits exist that outweigh the costs of stock splits incurred by the firm and its shareholders. The primary purpose of this article is to investigate the rationale for stock splits as well as to compare the reasons corporate managers give for issuing stock splits instead of stock dividends. As Eisemann and Moses note, it is possible that the reasons for stock splits and dividends differ [4, p. 80].