In somewhat rare situations, a company’s board of directors may wish to increase the value per share by reducing the number of outstanding shares.

While purchasing treasury stock reduces the number of shares, the action may not increase the market value per share because of the reduction of the corporation’s resources.

Thus, some corporations go through reverse stock splits in which the charter is amended to reduce the number of shares and increase the par value.

Like other splits, a reverse stock split does not produce any journal entries or changes in paid-in-capital. However, it does call for modified disclosures of stockholders’ equity and earnings per share.

Frequently Asked Questions

What are reverse stock splits?

A reverse stock splits is a corporate action undertaken by a publicly-traded company to reduce the number of shares held by insiders and private shareholders while increasing the per-share value of the stock held by the public.

What are some examples of companies that have recently undergone reverse splits?

Some companies who undertook reverse stock splits in recent years include A. Schulman, American Public Education, Inc., Covenant Transportation Group, Inc., Diamond Foods, Inc., International Game Technology PLC, and National CineMedia, Inc.

How does a company go about effectuating reverse stock splits?

In all cases, a corporation wishing to undertake a reverse stock splits amends its charter to reduce the number of authorized shares. In some cases, this is a board-only action that requires no further approval by shareholders or any other groups. In other instances, a company must put a plan of amendment to its stockholders for approval.

How do reverse stock splits differ from forward stock splits?

A forward stock splits is one in which the number of authorized shares is increased and each shareholder receives additional shares. Reverse stock splits are the opposite of Forward Stock Splits in that they are undertaken in order to reduce the number of authorized shares.

How do reverse stock splits affect earnings per share?

Reverse stock splits have no impact on a company’s reported earnings per share since all that is being done is an amendment to the existing charter reducing the number of authorized shares.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.