Business Law Case Study

Read "Berkshire Hathaway -- Can Buffett Be Replaced?" from page 26 of your textbook and post a thread answering the following question.

• Stock splits are one method in which a company’s management may control, and to some degree even alter, the stock price; yet, some companies choose not to utilize stock splits. Suppose you are the CFO of a publicly traded company, and the President is considering a stock split. Describe the reasons for and against why the company should engage in a stock split, as well as any possible ramifications from such action. Be sure to include substantiation, via citations, for your opinions.

Submit your thread by 11:59 p.m. (ET) on Thursday and post your reply by 11:59 p.m. (ET) on Sunday.

Stock prices are manipulated by management in several ways. One such way is a stock split. Logically, when stock is split, such as a 2-for-1 split; each share is worth half of the pre-split share value, consequently the number of outstanding shares doubles. The net effect in accounting terms is a zero-dollar change with the overall value remaining the same.

1. Typically, a company's stock split is a reflection that the company is performing well and occurs with the prospect of company growth thus generating the potential to attract new investors (fool.com). As a result, the split frequently has a positive effect on share prices. Stock splits have proven to increase and intensify demand, resulting in higher prices (rightline.net).

2. Based on supply and demand, when demand goes up, price increases (Gitman, 26-27). Therefore, stock splits present genuine opportunities to increase revenue. Since each share decreases in value when the stock splits, the company shares are more affordable to investors (ehow).

3. Research shows that splitting stocks outperform "non-splitting" stocks for up to three years after the split. Strong stocks tend to stay strong and the cycle begins again (rightline.net).

4. For purely psychological reasons, smaller investors tend to shy away from buying expensive shares with triple digit prices and may be more inclined to buy shares from the same company at a lower price. Increasing the number of outstanding shares at a lower per share price aids liquidity and may subsequently increase trading volume (Investopedia).

5. A stock split has no immediate impact on taxes of the shareholders because the overall monetary value of the stock does not change.

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