Stock Splits

Stock Split
Occurs when a corporation calls in its stock and replaces each share with more than one new share; decreases both the market value per share and any par or stated value per share. is the distribution of additional shares to stockholders according to their percent ownership. When a stock split occurs, the corporation “calls in” its outstanding shares and issues more than one new share in exchange for each old share. Splits can be done in any ratio, including 2-for-1, 3-for-1, or higher. Stock splits reduce the par or stated value per share. The reasons for stock splits are similar to those for stock dividends.



To illustrate, CompTec has 100,000 outstanding shares of $20 par value common stock with a current market value of $88 per share. A 2-for-1 stock split cuts par value in half as it replaces 100,000 shares of $20 par value stock with 200,000 shares of $10 par value stock. Market value is reduced from $88 per share to about $44 per share. The split does not affect any equity amounts reported on the balance sheet or any individual stockholder’s percent ownership. Both the Paid In Capital and Retained Earnings accounts are unchanged by a split, and no journal entry is made. The only effect on the accounts is a change in the stock account description. CompTec’s 2-for 1 split on its $20 par value stock means that after the split, it changes its stock account title to Common Stock, $10 Par Value. This stock’s description on the balance sheet also changes to reflect the additional authorized, issued, and outstanding shares and the new par value.

The difference between stock splits and large stock dividends is often blurred. Many companies report stock splits in their financial statements without calling in the original shares by simply changing their par value. This type of “split” is really a large stock dividend and results in additional shares issued to stockholders by capitalizing retained earnings or transferring other paid-in capital to Common Stock. This approach avoids administrative costs of splitting the stock. Harley–Davidson recently declared a 2-for-1 stock split executed in the form of a 100% stock dividend.

Point: Berkshire Hathaway has resisted a stock split. Its recent stock price was $150,000 per share.

Point: A reverse stock split Occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share. is the opposite of a stock split. It increases both the market value per share and the par or stated value per share with a split ratio less than 1-for-1, such as 1 for-2. A reverse split results in fewer shares.