It should be noted that companies engage in stock splits in order to manipulate and change the price value of each stock and influence trading liquidity. According to U.S. Securities and Exchange Commission (2022), a stock split is “an increase in the number of shares of a corporation’s stock without a change in the shareholders’ equity” (para. 1). The reverse stock split is the opposite of the latter, where existing stocks become a fraction of a newly reverse split one. In essence, a stock split decreases the price per share, whereas a reverse stock split increases it. These splits occur because there is “a psychological barrier might occur with high-priced trading shares. A very high stock price can intimidate investors who fear there is little room for growth … price appreciation” (Financial Industry Regulatory Authority, 2022, para. 6). A stock with a low price might appear unattractive to investors, whereas stocks with high prices might seem to lack growth potential.
The short-term effect of a split on a company’s financial statements is that a range of financial ratios will require some refiguring in order to adjust the score in accordance with new outstanding shares value. For example, earnings-per-share or EPS will need to a refigure to ensure that it properly reflects the company’s financials (Financial Industry Regulatory Authority, 2022). In the long term, achieving the desired stock price range might facilitate a higher level of investing, increasing the influx of investor money into the company. The main reason is that both stock split and reverse stock splits mostly influence trading liquidity by addressing a psychological barrier. These changes do not directly bring value to the company since the shareholder’s equity remains the same.
References
Financial Industry Regulatory Authority. (2022). Stock splits. Web.
U.S. Securities and Exchange Commission. (2022). Stock split. Web.