From: Keith Elis ('Hagbard Celine') (hagbard@ix.netcom.com)
Date: Tue Sep 16 1997 - 01:15:11 MDT
Max More wrote:
>
> At 12:42 PM 9/15/97 -0700, Ray wrote:
> >
> >The phenomenon you mention is exactly why stocks tend to rise after they
> >split: the split causes greater liquidity.
>
> I doubt this. The increase in liquidity seems to me insufficient to explain
> the extent of the common rise in price. However, I admit I don't have any
> hard evidence.
>
> A more plausible explanation for the post-split rise in stock price, it
> seems to me, is that investors see the split as a sign of management's
> confidence in future earnings.
I'll throw in with that.
First, I don't see how a split creates liquidity since no new shares are
being sold. As I understand it, it's a board decision to halve the value
of a share thereby doubling the number already in existence. Wouldn't it
be nice if a corporation could create liquid capital just by cutting its
share price?
Second, a stock split lowers price per share allowing more investors to
buy a greater number of shares. This has the common effect on share
price -- an increase.
Third, a corporation will not split its shares unless it has a pretty
damn good idea that it expects a few good fiscal years ahead. This
because a downward fluctuation of say 1/4 point is multiplied by the
number of shares. The more shares, the greater the damage to the asset
column.
Finally, investors are more likely to buy shares at a low or mid-range
price than a very high price. To keep the share price going up steadily,
the board should split when it can.
Just a thought or two,
Keith
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