Trading techniques… stock splits

Stock splits take place when a company decides to replace existing shares with multiple new shares. For example, in a two-for-one split a company could decide to replace one 100p share with two 50p shares. The idea is to stop the price of individual shares from getting so expensive that ordinary investors aren’t able to buy them, which could end up making them less liquid. For example, had Amazon not split its shares four times over its history, including a 20 for one split in 2022, its shares would be trading at $22,800 each rather than their current price of $97.

Stock splits are often seen as a bullish sign, as they suggest that management thinks that the share price will continue to rise. A 2012 study by Alon Kalay of Columbia University and Mathias Kronlund of the University of Illinois found that 2,097 splits on the New York Stock Exchange between 1988 and 2007 produced average abnormal returns of 1.6% in the three days around the announcement. Another study by Enok Gartvall and Carl Landahl of the University of Gothenburg looked at 2,101 stock splits for firms listed on the Nasdaq between 2001 and 2019 and found that their shares outperformed the market by an average of 2.24% for the five days around the announcement.

The longer-run performance of firms that have split their shares is even better. A 1996 study by David Ikenberry of Rice University, Graeme Rankine of American Graduate School of International Management and Earl Stice of Hong Kong University of Science and Technology found that 1,275 two-for-one stock splits on NYSE between 1975 and 1990 produced abnormal returns of 7.9% in the first year and a total of 12.2% over three years.