Why do companies use reverse/forward stock splits?

By Joseph Nguyen AAA
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. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ...
  3. What is the role of agency theory in corporate governance?

    Understand how businesses use agency theory in corporate governance. Learn how moral hazard problems may be addressed using ...
  4. How do I calculate current liabilities in Excel?

    Learn what current liabilities are and examples of a company's current liabilities, and find out how to calculate total current ...
RELATED TERMS
  1. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...
  2. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
  3. Registered Holder

    Shareholders who hold their shares directly with a company.
  4. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...
  5. Duty Of Care

    One of two primary fiduciary duties of directors, the duty of ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...

You May Also Like

Related Articles
  1. Trading Strategies

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

  2. Stock Analysis

    Will American Airlines Fall Back To ...

  3. Stock Analysis

    Qualcomm's New Buyback Program Is Well-Timed

  4. Investing Basics

    How To Calculate Goodwill

  5. Investing Basics

    Analysis of Companies with high goodwill

Trading Center