A:

Companies will use reverse/forward stock splits mainly in an attempt to save future administrative costs. A reverse/forward stock split involves two corporate actions: first, the company will perform a reverse stock split, and will immediately follow with a forward stock split. The purpose of doing this is to cash out any investors who have a small amount of shares. If the reverse split was done at one for 100, then any shareholders with less than 100 shares would be cashed out by the company. After cashing out the smaller shareholders, the company performs the forward stock split to bring the shares back to their original position.

The administrative cost savings come mainly in the form of mailings. In particular, money is saved by not having to print and mail proxies and other documents to smaller shareholders. For smaller companies, this can be a cost-effective strategy that can help trim expenses. The downside of doing this type of split is the message the company is projecting to small shareholders - that they don't matter. This can sometimes be detrimental to brand loyalty and result in negative public relations.

Another major area of potential cost savings from doing a reverse/forward stock split split comes from reduced regulation requirements, should the company have less than 300 shareholders. Sarbanes-Oxley regulations require companies with over 300 shareholders to comply with the increased regulations under the act. If the company is small enough, a reverse/forward stock split could reduce the number of shareholders enough to save the company a significant amount of money. (For additional reading, check out Understanding Stock Splits.)

This question was answered by Joseph Nguyen

RELATED FAQS

  1. What does it mean if a security is under consolidation and why is it important?

    Discover some of the different meanings for "consolidation" with respect to traded securities. Learn why consolidation is ...
  2. How do modern companies assess business risk?

    Find out how modern companies can assess business risks, how those risks can be identified and categorized, and why there ...
  3. Why has emphasis on corporate governance grown in the 21st century?

    Understand the key features of corporate governance and the factors that have led it to grow significantly in importance ...
  4. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    Learn the effects the Sarbanes-Oxley Act has on corporate governance in the United States, including strict disclosures, ...
RELATED TERMS
  1. Poison Put

    A takeover defense strategy in which the target company issues ...
  2. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  3. Back-End Plan

    An anti-acquisition strategy in which the target company provides ...
  4. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...
  5. Record Date

    The cut-off date established by a company in order to determine ...
  6. Program Manager

    A manager with oversight for the management of a specific program, ...

You May Also Like

Related Articles
  1. Trading Strategies

    What does it mean if a security is under ...

  2. Entrepreneurship

    Comparing Impact Investing & Venture ...

  3. Investing News

    A New Corporate Governance Initiative ...

  4. Stock Analysis

    Will American Airlines Fall Back To ...

  5. Stock Analysis

    Qualcomm's New Buyback Program Is Well-Timed

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!