Reverse Stock Split: What Is It?

Companies that engage in reverse stock splits have a terrible track record of underperformance against the stock market as a whole. Theoretically, changes in the arrangements of a corporations’ share count should have no effect on the underlying business, yet research shows that these types of splits are associated with underperformance.

A reverse split occurs when a company recalls your shares and issues you a fewer number of shares that trade at a higher price. In other words, the whole point of a reverse share split is that the company is saying that it’s better for you to have one hundred dollar bill rather than five twenty-dollar bills.

The Basic Overview

When the bylaws are drafted for a corporation, the Board of Directors are almost always granted unfettered authority to determine the capitalization structure. If a business raises $1 million, the corporation can decide to break it into 1,000,000 shares … Read the rest of this article!