Sep 22, 2016
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Split ends

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LAST month Intercontinental Exchange (ICE), an American firm that owns financial exchanges, said it would do a stock split, dividing each of its existing shares into five new ones. The split won’t increase ICE’s underlying value—slicing a pizza three or four times doesn’t make it bigger. But an old Wall Street rule of thumb holds that more shares with a lower price means a broader investor base. Retail investors can better afford a $60 stock than a $280 one.

That argument ought to resonate strongly. Share prices are near an all-time high. The average cost to buy a single share for a member of the S&P 500 index is now $88. But ICE is unusual. The incidence of stock splits is near an all-time low. In the past decade only 3% of S&P 500 firms each year split their shares, compared with 13% in the 1980s.

Several factors explain the decline. The more companies finance themselves with debt, and the less equity they raise, the less they care about whether their shares are bite-sized. Today equity raising in America is at subdued levels.   

The proportion of the American stockmarket that is owned by large institutions—as opposed to…Continue reading
Source: Economist

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