An Analytical Study of Impact of Splitting of Share on Financial Parameters

Abstract

INTRODUCTION: Capital Markets play an important role in the development of a country. As a general trend, the performance of the capital markets is viewed as an indicator or predictor of the economy. A period of constant increase in stock prices signals a period of growth for the economy whereas a period of constant fall signals a period of slowdown. All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. A stock split is a corporate action in which a company divides its existing shares into multiple shares. Conceptually, a stock split event is not expected to materially affect a splitting company's financials. The splitting company's existing shareholders continue to hold the same percentage holding in the company before and after a stock split. Despite these theoretical aspects, a company's stock split announcement has been observed to be a net positive impact event. After a split, new investors might be interested in buying the stock as it is available at a lower price, in the hope that they would stand to gain. A stock spiit may have no impact on the value of the investment if the fundamentals of the company remain the same. However, one would expect the market forces of demand and supply to determine the true price for the share as the liquidity increases and more floating shares become available after the split. The price performance of the share depends on the state of the market in addition to the fundamentals of the company.