June 19 article explaining share value drop due to stock-split:
(From the Nikkei website)
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Stock splits, which theoretically should have a
neutral effect on the aggregate market value of an
affected stock, have had a negative impact in
some recent cases. Behind the apparent anomaly
is a technicality barring trading in new shares
following the 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 with a 2-for-1
split, for example, exposing the investor to demands for additional
collateral. To pre-empt such margin calls, investors may sell the stock, to
the detriment of its market price.
Margin calls
A case in point is Softbank Corp., 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 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 supply-demand balance of a
firm's shares.
Other victims of split announcements include Rakuten Inc., which lost a
third of its market value in three days from May 15, when the Internet mall
operator disclosed an 8-for-1 split, and Itochu Techno-Science Corp.,
whose stock tumbled below 50,000 yen from over 80,000 yen after the
firm revealed plans for a 3-for-1 deal on May 17.
Market players also worry that investors may dump new shares issued as
a 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 that 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.
Constructive deposit system
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.
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