Skip to content

Viewer Mail

Welcome to the segment I like to call viewer mail. It’s where I answer questions from you, the viewer. I’ve got two good questions on tap for you this week, so let’s dig in!
Do 2 for 1 splits weaken a stock’s price?
That’s a pretty interesting question that needs to be looked at from 2 perspectives. Theoretically there should be no effect on the stock price. In the days before ubiquitous, cheap computing, stock brokers had fee schedules that penalized you for trading in odd lots – that is lots other than blocks of 100 shares. Companies believed that the sweet spot for trading was somewhere in the $25-$50 range where investors could get into a position for an investment of $2500 to $5000 dollars. Once a companies value appreciated to the point where the share price was out of the sweet spot, the directors would typically issue a stock split in order to return to the sweet spot.
When the stock split takes place, the only thing that happens is additional shares are floated in the market. The value of the company is still the same. If it were a $100 million company with 2 million shares outstanding, the per share value would be $50. If you owned 100 shares, you would have a $5000 position in that company. If the stock offered a 2 for 1 split, following the split you would own 200 shares, but your position is still only worth $5000. Thus, the per share price adjusts to $25. A stock split is nothing more than a bunch of accounting entries.
In practice, stock splits are often interpreted in the marketplace as signals. A split that results in shareholders having more shares is seen as a positive signal. That seems silly since it’s just an accounting entry. On the flip side is a reverse split, where a shareholder ends up with fewer shares than prior to the split. Again, the value of the position remains the same, only the # of shares outstanding and the price per share change. A reverse split is usually seen as a negative signal. They usually take place when negative events have occurred – like a potential delisting due to share price minimums set by stock exchanges. AT&T is a recent example of a company whose share price was so depressed that they felt the need to prop it up by doing a reverse split. Note that even in these cases the value of the company remains the same and the value of a shareholder’s holdings remains the same – it’s just a matter of how it’s divided up.
So now for a confession – during the late 90’s I would play this game even though I thought it was silly. If I could catch wind of a stock split early enough, I would buy a position in that stock knowing that it would go up on the news. And in every case it did. If you’re really interested in this subject, do a little more searching. I’m sure there have been numerous papers published that explore the price sensitivity of a stock facing various stock split scenarios (and if not, let me know and I will add it to my list of potential PhD dissertations).
What grade point average do you need to get in to University of Georgia?
This is a tricky question to answer. You can start by looking here to see the profile of entering Freshman in 2005. Those numbers may seem really impressive to folks outside of the state of Georgia, but trust me when I say they are inflated (see next paragraph).
I talked about the high cost of grade inflation over a year ago. Unfortunately, this has not changed at the high school level. To combat this problem at my alma mater, a new system of plus/minus grading has been instituted this semester. I think this is a step in the right direction, but it still leaves too much room for whining from the students since it is discretionary whether a particular instructor wants to use the system or not.

Comments are closed.