An investigation of the uses of reverse stock splits and an empirical analysis of their impact on the value of the firm

Date

1985

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Abstract

The research approaches reverse stock splits from both a cause and effect perspective. The underlying basis for management decisions to propose a reverse split is examined with an analysis of the institutional and legislative environment relating to security price level. There are two fundamental effects of a reverse split: 1) an increase in share price, which is theoretically in inverse proportion to the split ratio, and 2) a decrease in the number of shares in proportion to the split ratio. Both of these effects are explored to determine possible uses of reverse splits as a management tool. A model is developed which expresses potential costs and benefits to the firm. [...]

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Keywords

Stock splitting, Corporations--Valuation

Citation