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Saturday, May 07, 2016 4:55:49 PM
Your article:
Notice carefully that just the opposite conclusion should therefore apply to stocks undergoing so-called reverse splits, in which a company exchanges low-priced old shares for higher-priced new shares. In such a case, management is signalling that it has little confidence that its shares — on their own, without an artificial boost — would soon trade at a higher price.
Sure enough, Ikenberry reports that stocks undergoing reverse splits tend to underperform the market over the several years following the announcements of those reverse splits. A classic example from recent years is Citicorp’s C, +0.41% March 2011 announcement that its shares would undergo a 1-for-10 reverse split. Since that announcement, its shares have gained 17.9%, versus 62.9% for the Wilshire 5000.
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