January 25, 2010

Stock splits and reverse splits

Some of my work colleagues have been working for a few weeks on a traded company's reverse split. This is nothing super new and to be honest I am not aware of the legal intricacies of a reverse split under Spanish law. From my point of view, it just made sense from a volatility perspective, given that this company's stock was trading at quite a low price and thus, a simple rise or drop of 0.01 euros was quite substantial.

But to understand the rationale of stock splits and reverse splits, nothing is better that Damodaran's explanations (post of Jan 18) on the occasion of Warren Buffet's Berkshire Hathaway's decision to split its class B shares. Simple and clear.

I remember those corporate finance class at Stern. Corporate finance made easy.

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