Where psychology overrides financial logic
May 24, 2024
At business school, we learned—and universally agree—that stock splits do not impact a company’s fundamental value. However, the stock prices of companies that undergo splits (such as NVIDIA, which announced a split yesterday) often outperform in the subsequent months. The reasons for this are speculative. Firstly, management typically decides to split the stock following strong past performance that momentum investors expect to continue. Secondly, a stock split signals management’s confidence. Thirdly, it increases liquidity. This situation exemplifies how stock market psychology can override financial logic.
