What is a reverse stock split ? (investments)
Rather than increase the number of shares of common stock outstanding, a company may want to reduce the number of such stocks. It can accomplish this with a reverse stock split. Say for a reverse split of 1-4, the shareholders would be given one new share in exchange for four current shares.As with stock dividends and straight stock splits, there is likely to an information or signaling effect associated with the announcement of a reverse stock split. Usually the signal is negative, such as would accompany the admission by a company that it is in financial difficulty. However, financial difficulty need not be the underlying motivating factor for the reverse split.The company may want to move the stock price to a higher trading range where total trading costs and servicing costs are lower. Nevertheless the empirical evidence suggests that the share prices have dwindled around the reverse stock split announcement (assuming other things constant). Such a decline is tempered by the company’s past earnings performance, but a healthy company would generally refrain from undertaking a reverse stock split.
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