On the effect of stock splits
As a finance guy by training, I've always been fascinated by stock splits, such as the incredibly-rare seven for one split Apple announced yesterday. First off, just how rare is a seven-for-one split? Incredibly rare; since 1980, there have been only three splits bigger than that; all were ten-for-one splits.
By the books in Finance, a stock split adds no value to a person's shares, because it's simply a redivision of their current holdings. Consider someone holding 100 shares of Apple at yesterday's closing price of $524.75 per share:
- Pre split: 100 shares * $524.75/share = $52,475.00 value
- Post split: 700 shares * $74.9643/share = $52,475.00 value
The Finance books look at that, and say "no change in value, ergo, a stock split has no intrinsic worth." And they're right; there's been no change in value for any investor's holdings. But studies done over the years have shown that stock splits do have a positive impact on investor's holdings:
A 1996 study by David Ikenberry of Rice University measured the short and long-term performance of stock splits. His research included all the 1,275 companies whose stock split 2-for-1 between 1975 and 1990. Mr. Ikenberry compared the split stocks to a control group of stocks for similar-sized companies in similar sectors that had not split. His results were startling. The split stock group performed 8% better than the control group after one year, and 16% better after three years.
Why might that be? I'm sure the studies have detailed financial models to back up their findings, but to me, it boils down to two things…