When siblings fight over a late parent's will

When and why do stocks split?
-- Robert W., Florida

In theory, if the stock market is working efficiently, a stock split should have no impact on that stock's long-term performance -- any more than breaking a $20 into two $10s will make your money go further. When a stock splits "two-for-one," for example, each holder gets two shares for every share they've already got. But the price is cut in half, so the value of your overall holding stays the same.

Still, there's no such thing as a perfect market. We haven't seen any conclusive research on the topic one way or another. But there's a body of conventional wisdom out there that splitting a stock helps boost it's performance for reasons unrelated to the math on the day of the split.

Some investors believe that a stock split is a sign that the company sees the share price going higher -- which means it's a good stock to buy. But you could also make the case that the company is reacting to a high price by splitting, which means the stock may be coming to the end of a run-up.

Companies are also said to like to splitting their stock when it gets "expensive" (say over $100) because they figure more people can afford to buy the lower-priced shares, which increases demand, which -- all other things being equal -- helps lift the price.

One often-cited benefit of this is that, with more shares out there, large funds and other "institutional" investors maybe more interested. The theory is that these big investors don't like companies with a small number of shares outstanding - because when they move in our out of a stock, their action by itself will move the price against them. (Since neither the dollar amount nor the percentage stake in the company changes, we're not sure how much weight to give this theory.)

Over the long term, of course, a stock that keeps splitting is obviously a winner. But that doesn't prove that splitting caused the stock to go up. It just means stocks that keep going up split more than those that don't. Warren Buffet, whose Berkshire Hathaway stock has done pretty well over the years, is famous for not buying into the stock split theory. (At this writing, the stock traded at $91,490, a gain of $310 for the day.)

And, while there may be some evidence that stocks tend to jump right after a split, it's not clear that the gain holds up over the long run. It could be that the short-term boost is the result of the split -- as investors who believe splits are a good sign of a higher move jump into the stock.

If you come across any research with more conclusive results, let us know. Until then, we're inclined to put stock splits in the category of a neutral event that has no predictive value of long-term performance.

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