Negative impact of stock splits in Japan:
Thursday, June 8, 2000
STOCK SPLITS: Stock Market Turns Against Split Shares
TOKYO (Nikkei)--Stock splits, which theoretically have a neutral effect on the aggregate market value of an affected stock, have had a negative impact in some recent examples. Behind the apparent anomaly is a technicality barring trading in new shares, following announcement of a split, until they are formally issued.
The rule causes problems for shares used as security for margin trades since each individual share immediately loses value, by half, for example, with a 2-for-1 split, exposing the investor to demands for additional collateral. To preempt such margin calls, investors may well sell the stock, to the detriment of the market price.
A case in point concerns Softbank Corp. (9984), which announced a 3-for-1 split on April 12. The news reportedly caused dismay to quite a few investors after warnings from brokers of possible margin calls. Softbank shares fell by their daily price change limit for five straight sessions following the announcement, though the downturn was exacerbated by a parallel plunge in the U.S. Nasdaq composite index.
The episode turned the previously positive market perception of splits, which had been broadly associated with growth, to one of resentment because they are now seen as upsetting the demand-supply balance of a firm's shares.
Other victims of split announcements include Rakuten Inc. (4755), which lost a third of its stock value in three days from May 15, when the Internet mall operator disclosed an 8-for-1 split, and Itochu Techno-Science Corp. (4739), whose stock tumbled below 50,000 yen from over 80,000 yen after the firm revealed a planned 3-for-1 deal on May 17.
Market players also worry that investors may dump new shares issued as the result of a split as soon as they become available for trading. The number of split issues in late May was also a factor behind the market weakness, according to observers.
There are some ways to hedge against a fall in stock prices during some two months between a stock split and issuance of new shares, but the choices currently available are not very attractive. Short-selling requires new collateral, as do contracts which allow trading in allocation rights to new shares on issue. Also, only a limited number of over-the-counter stocks are strong enough to attract margin trading, while there is no functioning market for trading in rights to new issues of OTC stocks.
One proposed solution, which is gaining support, is to include split shares in a system used by the Japan Securities Depository Center (JSDC) to process pre-issue shares for members of the paperless transfer agency. Already several major securities firms and other interested parties, including the Tokyo Stock Exchange, are showing a readiness to consider favorably what is known as the constructive deposit system. Market sources talk about the possibility of adopting the system as early as this summer, though some are concerned such a move could be seen as discriminating against investors outside the JSDC.
As of April 30, the center accounted for 34.5% of all outstanding shares in companies publicly traded in Japan, either on stock exchanges or on the OTC market. Calls are mounting to quickly foster an environment that will allow stock splits to be undertaken with a level of efficiency on a par with the U.S.
(The Nikkei Financial Daily Thursday edition) |
