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Stock Splits: In Whose Interest?

CASELET, FINANCIAL MANAGEMENT
ET Cases, 5 pages
AUTHOR(S) : Y Bala Bharathi and Dr. Nagendra V. Chowdary

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Stock Splits: In Whose Interest?

 

In April 2014, the global stock markets (especially NYSE and NASDAQ) woke up to the stock split bells. What could have otherwise been routine company information has caught the attention of the business and the investing community. In what is seen as a sudden and surprising move, world’s most admired tech behemoths such as Google and Apple have either resorted to or announced stock splits. The announcements have come at a much needed hour when the stock prices of some of the Fortune 500 companies are zooming up unprecedentedly. Hence many more are expected to follow suit. This has apparently raised the eyebrows of certain quarters of analysts who wondered whether stock splits are coming back into vogue. And importantly, this has also brought into fore the most intriguing question, “What have rising stock prices got to do with stock splits?”

Though stock splits were all on the rage during 1980s and 1990s, they have almost come to a standstill with the outburst of dotcom bubble of late 90s as well as the financial crisis of 2008. Despite the fact that several companies shunned away stock splits for quite some time, Apple, Google and others have witnessed a renewed interest in stock splits. A few Indian companies too used stock splits to moderate the stock prices with mixed success. When companies split their stock, whose interests are they serving? Would they be serving short-term or long-term interests?

Vicious Cycle to Virtuous Cycle?

Historically, as stock prices move northwards, companies try to split their stocks to make them more accessible to small investors. Consequently, stock splits have gone in and out of the favor of financial world over the past three decades, drawing the attention of both fans and critics as well. According to FactSet, during 1970s, stock splits were all in rage with giants such as Coca-Cola Co., Wal-Mart Stores and International Business Machines, etc., going for stock splits.1 The number of stock splits peaked during 1980s as well, which witnessed 114 and 111 stock splits during the years 1986 and 1987 respectively.2 Nevertheless, stock market crash during the late 1987 has slashed the number of splits by 75% in the subsequent year.

In the go-go days of the tech craze and dot-com boom, stock splits were seen as a sign of strength and universal indicator of corporate prosperity. Hence, during the late 1990s, day-traders churned the market and led to a run-up of share prices of tech giants such as Yahoo, Intel, etc. This, in turn, paved the way for a new wave of stock splits which rose to 102 in 1997.......................

Growing Fervour

Though stock splits have gone out of fashion and companies seemed to be favouring high-priced stocks hitherto, the recent stock split announcements of tech
giants such as Google, Apple, etc..........

Google

One of the world’s largest internet and technology giants, Google, confirmed the proposed stock split which became effective from April 3rd 2014. News of the stock split was announced at a time when Google reported positive fourth-quarter earnings for FY 2013. Revenues surged by 17% Y-o-Y to $16.9 billion despite a long-running slump in its online ad revenue. Google earned $3.4 billion in the October- December quarter of 2013 vis-à-vis $2.9 billion during the previous year...............

Apple

After almost nine years since 2005, Apple came out with its long-awaited stock split. On April 24th 2014, the iPhone and iPad maker cheered the investors with its strong earnings report, shareholder friendly policies and last but not the least with its massive seven-forone stock split. Apple’s second-quarter profits increased to $10.2 billion from $9.5 billion a year ago and top-line also grew as well to $45.6 billion from $43.6 billion..............

Indian Companies

Though stock splits are relatively a new phenomenon in India, of late, Indian companies as well are resorting to stock splits to make their stocks more affordable to investors. Many companies such as HDFC Bank, Infosys, Siemens, Bharti Airtel, Sun Pharma, ITC, Axis Bank, Asian Paints, etc., have the history of splitting their shares.............

Assignment Questions

I. What are stock splits? What are the differences between a stock split, bonus issue and a reverse stock split?

II. Why do companies go in for stock splits? When do you think companies can go for stock splits?

III. ............

Exhibits

Exhibit I: $100 Stocks Becoming Commonplace

Exhibit II: Frequency of stock splits on the S&P 500

Exhibit III: Market Reaction to Apple Stock split Announcement

Exhibit IV: % Change in Post-split Stock Price after a Year

Teaching Note Preview

Stock Splits: In Whose Interest?

 

Synopsis

Stock split has been quite a popular strategy used by the companies for quite some time now. Several Indian as well as global companies have resorted to stock splits in the past many a times. While the objectives of the stock splits have been clear, the same cannot be said of timing and effects of stock splits. And also, it is rather difficult to point out which kind of companies/companies from industries should go for stock splits. In the backdrop of two global companies – Apple and Google – and an Indian company -Axis Bank - this caselet can be used to analyse the probable timing and the effects of stock splits.

Prerequisite Conceptual Understanding

The participants of this caselet are expected to have working knowledge of the following for an effective classroom discussion:

  • • The classification of shares
  • • The organisational and governance implications on each class of shares

 

Expected Learning Outcomes

At the end of this caselet, the participants are expected to have working knowledge of the following:

  • • The concept and connotation of stock splits
  • • The causes and effects of stock splits
  • • Analysis of timing pattern of stock splits

 

Positioning and Setting

This caselet can be used for any of the following modules/courses:

  • • Financial Statement Analysis module/course – To understand the implications of corporate events
  • • Valuation of Securities module in Financial Management/Corporate Finance course – To understand how the valuation of equity shares would differ when a company resorts to stock splits

 

Assignment Questions

  • I. What are stock splits? What is the difference between a stock split and a reverse stock split? What is the difference between a stock split and a bonus issue?
  • II. Why do companies go in for stock splits? When do you think companies can go for stock splits?
  • III. ...............

 

Suggested Discussion Dashboard

The caselet entails an interesting discussion on the concept and organizational implications of stock splits. This discussion can be carried out under two  sections given below. It should also be noted that each of the section’s discussion was centred around an anchor point.....................

Exhibits

Exhibit (TN)-I: Stages of a Stock Split

Exhibit (TN)-II: Impact of Stock Split, Reverse Stock Splits and Bonus Shares on Equity Capital

Exhibit (TN)-III: Timing of Stock Splits

Exhibit (TN)-IV: Institutional Investors and Stock Splits

Exhibit (TN)-V: Stock Splits, Talent Attraction and M&A Connection

Exhibit [TN]-VI: % Change in Post-split Price after an Year

Exhibit (TN)-VII: Impact on Valuation

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Abstract


This caselet can be used for understanding the accounting, financing and investing implications of stock splits. Having made their entry in early 1960s, stock splits have largely been the effect of heightened trading of company's shares. Every established company would have a history of its stock splits. However, the late 1990s, early 2000s coupled with 2008 global financial meltdown meant stock splits to be a relic. With Google and Apple announcing their stock splits in April 2014, the stock market and investor community once again seem to be celebrating good times. While Google announced its stock split with issuing of 'Class C' shares, Apple announced a traditional stock split. The market reactions, however, were different. Are they to last long? What would be the effect of these stock splits on share prices and shareholder wealth? What would be their shortterm and long-term effects?



Pedagogical Objectives

  • To understand the concept of stock splits, their history, accounting and investing implications
  • To discuss and debate the causes and effects of stock splits on a firm's stock market performance pre/post the stock split
  • To examine the causes and effects of Google and Apple stock splits and analyse the short-term and longterm effects



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- Caselet
- Teaching Note (**ONLY for Academicians)
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