Originally published July 15, 2009 at 12:00 AM | Page modified July 15, 2009 at 12:03 PM
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Analysis
Reverse stock splits don't always mean reversal of fortunes
Companies looking to prop up their stock price sometimes do what's known as a reverse stock split. The most recent is American International...
Companies looking to prop up their stock price sometimes do what's known as a reverse stock split. The most recent is American International Group, which approved a 1-for-20 split late last month.
In a reverse split, the company reduces the number of shares outstanding, increasing the share price proportionately. In AIG's case, investors received one share of stock for every 20 that they owned. It's similar to swapping 20 singles for a $20 bill.
But a reverse split often signals a company is in trouble, says James D. Rosenfeld, an associate professor of accounting in the Goizueta Business School at Emory University.
"They're stinkers," he says. "It really doesn't correct the underlying problems within the corporation."
Rosenfeld co-authored a study about reverse splits, which found that the value of the company's stock generally falls about 20 percent just in the first year after a split.
Copyright © 2009 The Seattle Times Company
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