David Tran
Nvidia (NASDAQ:NVDA) starts trading on a 10-to-1 split-adjusted basis Monday.
The stock, also juiced by strong earnings and guidance, is up more than 27% since the announcement of the split.
“In theory, there is no change in the underlying value of a company when it splits its stock,” Goldman Sachs equity analyst David Kostin said. “However, empirically, the academic literature has generally found positive announcement effects around stock splits.”
The 46 Russell 1000 (IWB) companies that completed stock splits since 2019 generated a 4 percentage point excess return vs. the equity weight S&P 500 (RSP).
“However, the stock price did not evidence a clear reaction after the stock split took effect,” Kostin said. “In addition, because many companies announce stock splits alongside earnings releases, it can be challenging to know how much of the stock rallies are due to the stock split as opposed to strong earnings results.”
One argument of why splits can lead to rallies is that it makes stocks more accessible to retail investors.
“Most recent stock splits have not generated a significant increase in retail trading activity, but there have been some notable exceptions,” Kostin said.
Comparing the average percentage of shares traded by retail investors six months before and six months after a split went into effect, companies overall saw just a 0.2 percentage point increase in retail share of trading activity.
“However, several mega-cap technology stocks experienced much larger increases,” Kostin said. “Amazon’s (AMZN) 2022 stock split led to a 7 pp increase in the average share of retail trading (from 14% to 21%).”
“NVDA’s previous 2021 stock split led to a (near) 7 pp increase (from 17% to 23%). Instances in which retail trading activity increased after the stock split also experienced stronger post-announcement returns.”
Liquidity could also play a factor.
“Academic theory suggests that splits help push stock prices back towards an ‘optimal’ balance between a high absolute price that carries low commissions and a low price that provides accessibility to smaller investors,” Kostin said. “This change would theoretically improve liquidity.”
“From a signaling perspective, theory suggests that stock splits are a way for managements to convey positive information or optimism about the company’s future. The academic literature is generally mixed on the driver of the stock split announcement effect.”
