Reasons for a Reverse Stock Split: Read Earning Transcript There are several reasons why a company may decide to execute a reverse stock split and reduce its number of outstanding shares in the market. Here are the main three motives:
- Prevent being delisted from an exchange: If a stock price falls below $1, it is at risk of being delisted from stock exchanges that have minimum share price rules. Being listed on a major exchange is important for attracting equity investors and, in some cases, the only way to prevent removal is to increase share prices by engaging in reverse stock splits.
- Boost the company's image if the stock price has dropped dramatically: If the stock is trading in the single digits, it is likely to be viewed as a risky investment, particularly if the price is near $1 or considered a penny stock by investors. There is a negative stigma attached to penny stocks traded only over the counter (OTC) 2 and sometimes the quickest method to escape this association and protect a company’s brand image is to engineer a reverse stock split.
- Draw more attention from analysts and influential investors: Higher-priced stocks attract more attention from market analysts, and a favorable view from analysts is excellent marketing for the company.3 They are also more likely to pop up on the radars of big institutional investors and mutual funds, many of which have policies against taking positions in a stock whose price is below a minimum value.
Criticism of a Reverse Stock Split
Reverse stock splits aren’t without flaws. In many cases, companies keen to artificially boost their share price in this manner risk being spurned by investors.Reverse stock splits can carry a negative connotation. As previously stated, a company is more likely to undergo a reverse stock split if its share price has fallen so low that it is in danger of being delisted. Consequently, investors might believe the company is struggling and view the reverse split as nothing more than an accounting gimmick. https://www.investopedia.com/ask/answers/071415/why-would-company-perform-reverse-stock-split.asp
In order to understand the financial health of the company one must read the transcript: https://www.fool.com/earnings/call-transcripts/2020/10/30/hexo-corp-hexo-q4-2020-earnings-call-transcript/