Stock split is all but dead and a new study says save your tears


1 minor mystery of this bull market has been the almost complete disappearance of stock splits. New research suggest there is more to it than simply passive investors who do not care what a share expenses.

An array of benefits accrue when stocks trade at the three and four digits, says Wolfe Research. High-priced stocks have reduced volatility, less short interest and reduced trade costs, the New York-based firm found.

Stock splits have gone the way of landline telephones since the Internet bubble, when they had been practically a coronation occasion for hot technology firms. Only four companies from the Samp;P 500 index have had one this year, compared with 102 in 1997, data accumulated by Samp;P Dow Jones Indices show.

Insert a nine-year rally, and the result is more companies trading above $100 (U.S.) — nearly a third of Samp;P 500 members, as of Tuesday’s close. Normally, stocks cost $99.95, the most on record.

“Companies may find a feeling of pride and focus with elevated share costs, but this is hard to objectify,” Wolfe strategists such as Javed Jussa and Yin Luo wrote in a note this week. “More importantly, we find that firms with higher share prices have three favorable characteristics when examined through a quantitative lens{}”

Volatility generally falls as stocks grow, they discovered. One of seven groups ranked by cost, stocks under $1 reveal the largest price swings, with median realized volatility reaching 90 percent. As price goes up, fluctuations narrow to about 20 percent for stocks trading between $500 and $1,000.

High-priced stocks also dissuade short sellers, particularly in regards to small-cap companies. Short term interest, as described as active usage by Wolfe, is 28 percent for the least expensive of the five groups. It keeps falling as share prices move higher and reaches 6 percent for the top rankings.

“Low levels of volatility will create these stocks less attractive to high-frequency traders, day traders, retail investors, and short-duration systematic strategies and consequently possibly more desirable to longer term investors,” the strategists wrote.

As volatility goes lower, so does the market impact of purchasing and selling large lots, a determinant of trade costs. For investors paying agents on a per-share foundation, a $1-million trade would also imply 10 percent savings on a $100 stock than a $10 stock.

Not everyone is thrilled with the extinction of breaks. U.S. exchanges occasionally bemoan the trend, saying higher price tags discourage individual investors. Chris Concannon, the president of CBOE Holdings, stated in a May 2016 notice that elevated costs can damage liquidity and investor involvement, affecting returns and the value of stocks.

While the Wolfe study concentrates on individual stocks, it comes at a time of near record tranquillity on the current market, with the VIX past month reaching some of its lowest readings in just two decades. Could the incidence of expensive stocks be holding marketwide volatility down? That is a stretch, say the authors.

“There are several possible reasons behind the record low level of volatility,” Mr. Luo said in an interview. “Lack of low and divides economy vol go side-by-side, but it is probably too much to indicate lack of breaks ‘trigger’ low vol.”

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