Dollarama recently posted another strong quarter. In addition to the quarterly results, the company also announced the proposal of a stock split in the ratio 1: 3. Dollarama shareholders can expect to receive two additional shares for each stock they own. According to the press release, only “shareholders registered at the close of business on 14 June 2018 are entitled to receive the two additional shares”. Does a split benefit the investors?
There is a major reason why companies are executing stock splits to improve liquidity. If the stock price of a company becomes too high for smaller investors, or if it is significantly higher than that of its competitors, a stock split leads to an impairment of the company’s share price. Therefore, a split can have the psychological effect of making the company more affordable for smaller investors, who in turn should buy more shares.
A study examining the 30 largest US companies in terms of market capitalization that conducted a stock split between 2001 and 2010 revealed no significant benefit. Exactly half of the companies achieved a positive return over a period of one year after the split and the other half a negative one.