T.HNY Disadvantages of reverse split to Shareholders Reverse stock splits
A reverse stock split usually occurs when a company’s management wants to raise the price of its stock. Just as ordinary splits can occur when management believes the price is too expensive, a reverse stock split means the company feels that the stock’s price is too cheap. If a stock’s price looks too low, that may discourage interest by individual or institutional investors.
Management wants to drum up more interest in the stock for the benefit of shareholders (some of whom are probably insiders).
The company may also do a reverse split to decrease costs. When you have to send an annual report and other correspondence regularly to all the stockholders, the mailings can get a little pricey, especially if you have lots of investors who own only a few shares each. A reverse split helps consolidate shares and lower overall management costs.
Technically, a reverse split is considered a neutral event. However, just as investors may infer positive expectations from an ordinary stock split, they may have negative expectations from a reverse split because a reverse split tends to occur for negative reasons.
One definitive negative reason for a reverse split is if the company’s stock is threatened to be delisted. If a stock is on a major exchange and the price falls below $1, the stock will face delisting (basically getting removed from the exchange). A reverse split may be used to ward off such an event.
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