Introduction
Exchange activity may be characterized by drastic actions by various organizations to strengthen their position. Thus, resorting to stock splits and reverse stock splits differ in results but have similar justifications for improving companies’ attractiveness. Carrying out such operations can significantly help firms remain relevant players on the stock exchange for a long time. To study these factors, it is necessary to analyze their influence and underlying causes.
Causes and Effects of Stock Splits
A stock split is a company dividing existing shares into several new ones, reducing their value and increasing the total number. One of the reasons for such activity may be an increase in liquidity, which occurs because cheaper shares become more attractive to buyers. The short-term consequence of such a decision may be a price adjustment and increased shares while maintaining capitalization (Titman et al., 2022). At the same time, the long-term consequences are increased liquidity and signaling growth. This means the company is showing signs that it can develop further and improve its financial performance, which is noteworthy for investors.
A reverse stock split differs from the operation discussed above in that it reduces the number of shares outstanding. This leads to an increase in their value, which may occur to avoid delisting. If the stock price falls, a reverse split can slow down the process and make it less noticeable to investors (Yuniati et al., 2020). The short-term consequences are a reduced number of shares and a price increase. Long-term can be called the perception of the market that will not change since the shares will continue to fall if such a rate is not regulated by the company (Yuniati et al., 2020). Another consequence is an increase in the company’s financial health, which may improve due to an increase in the share price.
Conclusion
In conclusion, stock splits and reverse stock splits are opposite processes that produce different results for companies depending on the actions on the stock exchange. A stock split involves increasing the number of shares by lowering the price. This can have a positive impact on the organization’s stock performance and its financial viability. At the same time, a reverse stock split can combine several shares to increase their price as a last chance for firms to maintain a presence on the stock exchange.
References
Titman, S., Wei, C., & Zhao, B. (2022). Corporate actions and the manipulation of retail investors in China: An analysis of stock splits. Journal of Financial Economics, 145(3), 762-787. Web.
Yuniati, R. N., Putri, M. S. A., & Rabbani, L. S. (2020). Study of Comparison of Stock Performance Before and After Doing Split Stock In Go Public Companies That Are Listing on The Idx Period 2013–2015. AptisiTransactions on Technopreneurship (ATT), 2(1), 1-17. Web.