However, in reality, since the motivation behind most reverse splits is generally looked at unfavorably by the investment community, these splits often immediately create downward pressure on a stock, whereas a forward split, more often than not, pushes a stock’s price higher in the near term.
REASONS FOR A REVERSE STOCK SPLIT
So, if the market views reverse stock splits with a jaundiced eye, you may ask, why would a company decide to do such a split? The reasons are varied, and include:
1. The desire to increase the share price, especially if the shares are penny stocks. Low prices tend to elicit negative emotions in investors and inhibit the attention of the big money on Wall Street or coverage by major research firms.
2. Companies looking to create spinoffs at attractive prices may use reverse splits. Tyco International (TYC), Motorola Solutions (MSI) and Time Warner (TWX) all employed this strategy when they broke up their companies.
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