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Stock Splits, Normal Price Range, Nominal Stock Price, Nominal Share Price Puzzle
Corporate Finance | Finance and Financial Management
In the field of Finance, one topic of interest is the nominal share price price puzzle, or why the average nominal share price of common stock has remained constant around $35 per share since the Great Depression. Stock splits are one tool that firm managers have at their disposal in order to regulate the nominal share price of stocks. In this study, I examine the U.S. stock splits that occurred between the years 2010 and 2015 and try to understand the reasoning behind why a firm partakes in a stock split by analyzing the pre-split and post-split nominal share prices. After running a univariate regression, some statistically significant evidence was found indicating that split factor increases with the pre-split price of a splitting firm. However, an additional regression and the corresponding graphical results show that pre-split price is the strongest explanatory variable for post-split price. This evidence is not consistent with the idea that firms are splitting to a “normal” range, which is determined by market and industry-wide price averages as well as firm-specific prices, or splitting into an optimal trading range to increase marketability. Instead, these results suggest that firms are following norms or tradition when partaking in a stock split.
Honors College Research Project
Sevier, Cody A., "Stock Splits: An Analysis of Firms Based on Pre and Post-split Nominal Share Price" (2016). Undergraduate Theses and Professional Papers. 80.
© Copyright 2016 Cody A. Sevier