So, the following comment was made: "Part of the reason for Friday's split, said Facebook spokesman Jonny Thaw, was to help reduce the price of Facebook's shares, which have risen significantly in recent years."
Now, a reasonable argument can be made that once shares start to be worth more than $10,000 - and certainly in the case of outliers like BRK-A (currently at $124,015/share), there is an argument for a split (or, in the case of BRK, a tracking stock - BRK-B) - simply to prevent the creation of pools that allow people who don't want to buy $10,000 in a single stock to participate. (I think that's why Warren had BRK-B created)
But, facebook is trading in the secondary markets (sharespost) at $72. Even assuming they double in value, that would suggest a price that anyone who wanted to purchase, could do so.
So, clearly, there is another reason as to why this stock is being split - and I don't put much merit in the "When a stock is split, it shows an increase in value" - I have far too much faith in the efficient market to put much belief in that nonsense.
My theory, is that there are other, secondary benefits from splitting a stock. My two guesses are:
o Bankers get to book a bunch of revenue from splitting the stock and the paperwork that goes with it, so they sell mgmt on the idea.
o Some legal advantage to splitting shares, and possibly doing an inventory of all the stock certificates outstanding, getting an audit of the shareholders, etc...
Is there anybody that has been on the decision making team for a stock split that would like to weigh in on this one?
Let's say they're able to report, pre-IPO, that "we've had 2 splits in the past 2 years just to get down to a market-friendly IPO price!" Not that it's rational, but some people would see that as a bullish signal.
That's the "Market Cap will be higher if Stock Price is smaller" theory that I'm not a huge fan of.
If it were true, then there would be a _great_ arbitrage opportunity for efficient market practitioners who were instead focused on ROE/ROI/Cashflow principals of stocks that had excessive value because they had been "split."
In the short term, market is a voting mechanism, long term it's a weighing device. The major challenge is trying to differentiate between the two - but Market Splits would seem to be custom designed to be 100% voting bias.
It's not an arbitrage opportunity, it's selling liquidity. The risk is that you might be unable to sell the high-price stock when you want to.
The premium for liquidity is real and important. Compare charts for Chipotle and Chipotle-B (CMG.B = CMG + 10x voting rights) - until the end of last year, CMG traded at a significant premium over CMG.B.
Agreed - but I don't know if there is any evidence to suggest that $72 vs $14.40/share will have any significant liquidity impact on buyers and sellers. $72 is hardly a "high-price" stock.
I think the poster who suggested that being able to lure employees in with 5x the number of options had it right. After the split, an employee who would have been granted 3,000 options, will now get 15,000 options.
Interesting! Could some of that effect be from people wanting "Chipotle" rather than "Chipotle-B"? One would hope investors would be more educated than that; but, before reading your post, if I'd been offered 10 shares of Chipotle or 10 shares of Chipotle-B and had to make my pick just on name, I'd certainly have taken the former.
500 shares sounds a lot better than 100... important for hiring top talent... What's really fascinating is the secondary market. Sharespost must be loving this.
Yes. You'd be surprised at how many people can tell you the number of options they have, but not the percent of the company/equity/employee pool those options represent.
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[ 3.1 ms ] story [ 47.1 ms ] threadNow, a reasonable argument can be made that once shares start to be worth more than $10,000 - and certainly in the case of outliers like BRK-A (currently at $124,015/share), there is an argument for a split (or, in the case of BRK, a tracking stock - BRK-B) - simply to prevent the creation of pools that allow people who don't want to buy $10,000 in a single stock to participate. (I think that's why Warren had BRK-B created)
But, facebook is trading in the secondary markets (sharespost) at $72. Even assuming they double in value, that would suggest a price that anyone who wanted to purchase, could do so.
So, clearly, there is another reason as to why this stock is being split - and I don't put much merit in the "When a stock is split, it shows an increase in value" - I have far too much faith in the efficient market to put much belief in that nonsense.
My theory, is that there are other, secondary benefits from splitting a stock. My two guesses are:
o Bankers get to book a bunch of revenue from splitting the stock and the paperwork that goes with it, so they sell mgmt on the idea.
o Some legal advantage to splitting shares, and possibly doing an inventory of all the stock certificates outstanding, getting an audit of the shareholders, etc...
Is there anybody that has been on the decision making team for a stock split that would like to weigh in on this one?
If it were true, then there would be a _great_ arbitrage opportunity for efficient market practitioners who were instead focused on ROE/ROI/Cashflow principals of stocks that had excessive value because they had been "split."
In the short term, market is a voting mechanism, long term it's a weighing device. The major challenge is trying to differentiate between the two - but Market Splits would seem to be custom designed to be 100% voting bias.
The premium for liquidity is real and important. Compare charts for Chipotle and Chipotle-B (CMG.B = CMG + 10x voting rights) - until the end of last year, CMG traded at a significant premium over CMG.B.
http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...
I think the poster who suggested that being able to lure employees in with 5x the number of options had it right. After the split, an employee who would have been granted 3,000 options, will now get 15,000 options.