How do stock splits effect share value?

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How do stock splits effect share value?

If either an increase in the number of authorized shares and/or a change in par value are necessary, a split up or split down requires an amendment to the company’s articles of incorporation and the approval of the shareholders.  After either a split up or split down, a stockholder experiences no effective change in proportionate interest.

A share split involves the increase in the shares without payment.  The earnings-per-share (EPS) calculation must be adjusted for the effect of change in number of shares.  If no adjustment to EPS were made to account for the share split, earnings per share would appear to have significantly decreased in the year in which the split occurs as compared to the EPS of prior periods.  This suggests that the performance of entity has declined even if the performance of the entity does not change.

Earnings Attributable to Common Shareholders/(Weighted Average Shares + Additional Shares)

To facilitate a valid comparison of EPS, the weighted average shares are increased by the number of additional shares issued in the year of the share split occurred and in any comparative prior periods and presented as though the shares had been split from the beginning of the comparative periods for the comparison of the entity's performance over the period of time as reflected in the EPS ratio.

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