Stock Splits on Paris Bourse : A Way to 'Divide and Conquer' - Managers’ Incentives and Investors’ Preferences
Most of stock splits announcements in France display as primary objective to facilitate access to the securities for individual investors and to improve liquidity. The existence of standards or preferences from investors in terms of price level, and especially a preference for low priced stocks from retail investors, seems to be at the origin of this phenomenon. The main issues are: to know what incentive could push managers to lower the stock price in order to attract individual investors and who are the winners and the losers, if any, in this operation. In this paper, we investigate the in and outs of these operations and we develop a simple model of stock price level optimization. On the one hand, this enhanced liquidity seems to be desirable by institutional investors on their investment. On the other hand, the shareholding enlargement, to the benefit of individual investors, causes a decrease in the return rate required by the market. Finally, this decrease in the required return rate limits the effort providing and the risk taking for the manager. We illustrate this proposal by empirically studying French market reactions to stock splits/reverse splits announcements and realization dates, between January 2003 and December 2007