Goldman Sachs analysts noted Friday that when a company splits its existing shares into a larger number of shares, a process known as a stock split, this event tends to have a favorable effect on the company’s stock price in the short term. The company used the recent example of Nvidia’s (NVDA) decision to split every existing share into ten new shares.
Goldman Sachs analyzed 45 cases in which companies in the Russell 1000 index split their shares since 2019. They found that, on average, stock prices rose 4% in the week following the announcement of the stock split from part of society. However, “stock prices did not show a consistent pattern of change in the weeks following or around the date the stock split became official,” according to Goldman Sachs.
Simply put, the positive effect of splitting into multiple stocks on stock prices tends to be temporary. Goldman Sachs noted that the rise in stock prices often returns to pre-date levels by the time index-tracking funds add the new split stocks.
The Wall Street firm suggests that one reason for the immediate positive market reaction is the expectation that more shares will be available at a lower price per share, which could make it easier for more people to purchase shares. number of investors, possibly increasing the number of shares bought and sold.
Despite the initial increase in the stock price, Goldman Sachs warns that the actual change in the number of shares bought and sold does not always increase significantly after the new shares are officially available.
Analysts also mentioned the influence of individual and non-professional investors in the process of splitting shares into a larger number of stocks.
“The growing participation of non-professional individual investors in recent years motivates companies to make their shares more accessible,” the analysts said.
However, the effect on the activity of non-professional individual investors after the stock split was generally modest, with some notable exceptions. For example, after Nvidia’s stock split in 2021, the percentage of shares traded by non-professional individual investors rose from 17% to 23%. Likewise, when Amazon (AMZN) split its shares in 2022, the percentage increased from 14% to 21%.
“Where non-professional individual investor activity increased after the company split its shares, there were also larger increases in the share price following the announcement,” Goldman Sachs reported.
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