Stock Splits Are Short-Term Positive for Stocks By Investing.com

Analysts at Goldman Sachs noted Friday that stock splits are a short-term positive for stocks, pointing to the recent example of Nvidia's (NASDAQ:) 10-for-1 split announcement.

Based on 45 stock splits within the Russell 1000 since 2019, stock prices typically rose 4% in the week following the announcement “but prices did not show a clear reaction in the following weeks or around the effective date,” Goldman said in the note.

In other words, the positive impact of stock splits on stock prices is generally short-lived. In fact, the price rise tends to reverse on the actual inclusion date, when index funds buy the addition, Goldman said.

According to the Wall Street firm, one of the reasons for the immediate bullish reaction is the perception of increased liquidity. Stock splits theoretically push prices toward an optimal equilibrium, thereby improving accessibility for small investors and potentially improving liquidity.

Despite the initial spike, Goldman cautions that liquidity does not always show a significant change once the split takes effect.

Analysts have also highlighted the role of retail investors in stock splits.

“The increased activity of retail investors in recent years is also encouraging companies to increase the accessibility of their shares,” the analysts add.

However, the impact on the retail business after the split has been modest, with a few notable exceptions. For example, Nvidia's previous stock split in 2021 resulted in a significant increase in the average retail share, from 17% to 23%, while Amazon's (AMZN) 2022 split increased the share of 14% to 21%.

“Cases in which retail trading activity increased after the stock split also saw higher returns after the announcement,” Goldman continued.