Are stock splits good for the share price or not? Deceased Nobel Prize winning economist Merton Miller didn’t like them. “Everyone recognizes that’s a joke because obviously the number and shape of the pieces doesn’t affect the size of the pizza. And similarly, the stocks, bonds, warrants, etc., issued don’t affect the aggregate value of the firm.” He also said, “Another is, if you take money out of your left pocket and put it in your right pocket, you’re no richer.”
However, some research shows differences in the actual data. Professor David Ikenberry studied splits, here is what he found.
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.
In August 2003 Mr.Ikenberry – now Chairman of the Finance Department at the University of Illinois at Urbana-Champaign – updated the stock split study. This time he looked at companies from 1990 to 1997. Using a similar methodology that included 2-for-1, 3-for-1 and 4-for-1 stock splits, he found the results were essentially the same. Shares of split stocks on average outperformed the market by 8% the following year and 12% over the next three years.
In Hong Kong, the study was replicated
“Although stock splits seem to be purely cosmetic, there is ample empirical evidence that they are associated with abnormal returns. This study analyzes the effect of stock splits using intraday data and insider trading data in Hong Kong from 1980 to 2000. Consistent with the findings of other countries, we observe positive price reactions in Hong Kong.”
Interestingly, they don’t seem to help liquidity.