The consequences of the stock dividend and stock split are the increased number of shares outstanding. However, since there is no added value (economically), then the share price per-sheet becomes smaller. The total effect of stock dividends and stock split does not exist, in other words, the total value of the company (stock) will be the same.

The conduct of the reasons Stock Dividends and Stock Splits

• Companies want to hold cash, but also want to pay dividends. Resolution is to pay stock dividends or stock splits.
• The company wants to acquire trading range that is considered ideal.
• Companies want to give signals to the market. Empirical discovery indicates that the price will react positively when the stock split was announced.

Reverse Split

Reverse stock split is the inverse of the spit (stock split). In a reverse split, a few shares of stock are united into one.

In the real world, a reverse split can be done for several reasons. First, a stock whose value is too small is often regarded as a stock that is not good or not ‘respectable’. Investors consider the company has poor prospects, and tend to rate low (underestimate). For that price the stock is increased to approach the ideal range. Secondly, if the stock price increases, transaction costs are expected to be smaller (the inverse of the empirical effects of stock split invention). Smaller transaction costs are expected to encourage the liquidity of shares.