$NVIDIA (NVDA.US)$Starting from Monday, the stock has been trading at a split ratio of 10 to 1. Driven by strong profits and guidance, the stock has risen more than 27% since the announcement of the split.
Goldman Sachs stock analyst David Kostin said, "In theory, when a company splits stock, its fundamental value doesn't change. However, empirical research shows that announcements of stock splits have positive effects."
The return rate of the 46 Russell 1000 index companies that completed stock splits since 2019 has been 4 percentage points higher than that of the S&P 500 index.
Kostin said, "However, after the stock split took effect, the stock price did not show a significant reaction. In addition, because many companies announce stock splits while releasing earnings reports, it is difficult to know how much of the stock price increase is due to the stock split and not to strong earnings results."
One of the reasons why stock splits can cause a rise in stock prices is that they make it easier for individual investors to buy stocks.
Kostin said, "Most recent stock splits have not led to a significant increase in retail trading activity, but there are also some notable exceptions."
Comparing the average percentage of stocks traded by retail investors in the six months before and after the stock split took effect, the company saw an increase of only 0.2 percentage points in the overall share of retail trading activity.
Kostin said, "However, the increase in several large-cap technology stocks is much greater. Amazon (AMZN.US) saw an average increase of 7 percentage points in retail trading activity after its stock split in 2022 (from 14% to 21%)."
"Nvidia's stock split in 2021 resulted in a nearly 7 percentage point increase in its stock price (from 17% to 23%). With the increase in retail trading activity after the stock split, the post-announcement return was even stronger."
Liquidity may also be a factor.
Kostin said, "Academic theory suggests that stock splits help push stock prices back to the 'best' balance, the balance between high absolute prices (charging low commissions) and low prices (providing accessibility to small investors). In theory, this change will improve liquidity."
"From a signal transmission perspective, academic theory suggests that stock splits are a way for management to convey positive information or optimism about the company's future. Academic literature on the driving factors behind the announcement effect of stock splits is usually mixed."
Edited by Jeffrey