Stock splits and reverse stock splits are corporate actions that change the number of outstanding shares without affecting the company’s total market value. These actions impact the per-share price and the number of shares held by investors, but they do not affect the company’s total equity.
A stock split increases the number of shares outstanding while reducing the share price proportionally. Companies typically perform stock splits to make their shares more affordable and increase market liquidity.
If a company has 1 million shares outstanding at a price of $100 per share, a 2-for-1 stock split means:
✔ The number of shares doubles to 2 million
✔ The stock price halves to $50 per share
✔ The total market value of the company remains the same
Stock splits do not require a journal entry because they only change the number of shares and their nominal value. However, companies must adjust the par value per share in their records.
For example, if the original par value was $1 per share, after a 2-for-1 split, the par value would be $0.50 per share.
A reverse stock split reduces the number of shares outstanding and increases the price per share. Companies typically use reverse stock splits to:
✔ Prevent delisting from stock exchanges (if the share price is too low)
✔ Improve investor perception by making the stock price appear stronger
✔ Reduce volatility
If a company has 5 million shares outstanding at $2 per share, a 1-for-5 reverse split means:
✔ The number of shares reduces to 1 million
✔ The stock price increases to $10 per share
✔ The total market value remains unchanged
Like a regular stock split, a reverse stock split does not require a journal entry since it only affects the number of shares and their par value. However, the company must update its stock records to reflect the new share structure.
If the par value was originally $0.50 per share, after a 1-for-5 reverse split, it would become $2.50 per share.
📌 Stock Splits:
✔ Increase the number of shares outstanding
✔ Decrease the per-share price
✔ Reduce the par value per share
✔ No impact on total equity or retained earnings
📌 Reverse Stock Splits:
✔ Reduce the number of shares outstanding
✔ Increase the per-share price
✔ Increase the par value per share
✔ No impact on total equity or retained earnings
Stock splits and reverse stock splits are primarily cosmetic changes and do not affect a company’s fundamentals. However, investors often interpret these actions as signals about a company’s future performance.