A Study of Stock Splits in the Post War Years

THE POSTWAR ECONOMIC PROSPERITY in the United States has been marked by the presence of many general business and security market conditions typical of such a period. One of the more salient characteristics manifested by stocks listed on the National Stock Exchanges has been the wide-spread practice of stock-splitting by corporations in every field of business. Historically, this movement has been the second of its kind, precedented only by the wave of stock-splitting which occurred throughout the 1920's, our previous period of high prosperity. Because investors have become increasingly aware that special situations which arise in individual companies often provide opportunities for advantageous placement of their funds, and because potential stock splits frequently create such opportunities, an understanding of split-ups and their effects may offer valuable assistance in sound and enterprising portfolio management. While most investors are aware of the existence of the phenomenon which often results in the sum of the parts being greater than the whole, there continues to be a lack of understanding of the broader ramifications involved, of the causes for split-ups and of the reasons justifying their effects on the market for split shares. It was the purpose of the research, on which this article is based, to attempt to clarify the significance of stock split-ups and to point out their potential importance in investment management by examining in detail their more important features, their causes, and their effects in relation to the individual securities and companies involved and to the stock market in general, with particular emphasis on the price movements of split shares. A stock split-up is effected when the number of a corporation's hares is increased by the reduction of the par or stated value of the stock. This means that the existing stock is divided into a greater number of shares without any change in the total amount of the company's capital account or surplus account, and without any change in each stockholder's equity in the corporation. For the purpose of the study, only stock splits of two for one or better, or stock dividends of 100% or more were considered. In the case of a stock dividend, as opposed to a stock split, the corporation must debit or decrease its surplus account, and credit or increase its capital stock account. However, the net result of both the two for one stock split and the 1 00% stock dividend is to double the total number of outstanding shares. The study was confined to stocks listed on the New York Stock Exchange, since daily records and complete statistical information are not always available for shares sold on various other exchanges.