​Will Apple's cool rub off on stock splits?

Apple went old school on April 23 with the announcement of a 1-7 stock split, a move that has lost popularity over the last two decades with low double-digit activity in recent years compared to the more than 120 stock splits seen in 1997. That's a shame says Credit Suisse because the move has clear benefits for both investors and companies. Analyst Ana Avramovic reports that splits among S&P 500 companies in the last three years spurred short-term price hikes (after the required pro rata cut) and greater volume, both of which companies appreciate. But they also delivered tighter bid-ask spreads, better price discovery, and easier retail investment in high demand blue chips, all of which are good for markets. The reason for the near-term bounce in prices is due to the signaling effect (i.e., investors believe managers won't approve a split unless they believe the company is on the right path) and the increased number of people able to purchase shares in high demand companies, a point that an earlier 2005 paper from economists Ravi Dhar, William N. Goetzmann, and Ning Zhu also supports. Investors may want to hope that Apple's halo effect makes the stock split cool again.

First published in 2014 in The Financialist