Strategic Corporate Finance: Applications in Valuation and Capital Structure

STOCK SPLITS

Stock splits are common. The widespread use of stock splits has historically kept the share price of publicly traded companies constant despite inflation and real growth. Reverse splits are used to maintain price points in much the same way.

One long-term study of stock splits for the period 1963 to 1982 showed that, on average, 6 percent of companies split their stock each year, at a median presplit price of 43.50 dollars.11 Another study showed that the average share price on the NYSE has fluctuated between $30 and $40 since the 1930s.12 This price range has been maintained even though consumer prices have increased by a factor of 10 and the S&P index increased by a factor of 16 since the 1930s. Of 7,726 companies, 21 percent split over the past 15 years, and 5 percent split over the past 5 years.

But since 1990, stock splits have not kept pace with the market and the average stock price has increased. Over the period 1990 to 2005, the average price of all shares outstanding rose from $18 in 1990 to $40 in 2005. Over the same period, the percentage of shares priced above $50 soared from about 3 percent to more than 9 percent.

The data do show, however, little increase in the number of companies that are willing to let their stock price go above $100, and this figure has held at about 1 percent. This seems to be primarily a marketing decision with $100 representing an important premium position price point in the psyche of investors.

The prevalence of splits has long ...