Now, those penalties have long been eliminated. Meanwhile, some research does seem to indicate a positive correlation between stock splits and stock prices. A study of the performance of 2,750 companies from 1975 to 1990 conducted by Rice University professor David Ikenberry found that shares climbed, on average, about 3.4 percent in the days immediately following a stock split. More significantly, the study found that over a three year period, shares that were split outperformed comparable issues by about 8 percentage points the following year, almost 9 percentage points the second year, and 12 percentage points the third year. Those figures indicate some long-term investment significance can be gleaned from stock splits.
Stock splits in and of themselves have no redeeming economic value, but they do contain information.
That is, companies don't just randomly split their shares. They tend to do it when they are optimistic about where the company is headed. In addition, the strong performance of the stocks that split could be related to the fact that companies which split tend to be among the fastest growing firms to begin with. The key is to see a stock split as a tip-off and then seek out additional clues. Companies that have major stock incentive plans, for example, may use stock splits to bolster their management's compensation packages.