LAST month Intercontinental Exchange (ICE), an American firm that owns financial exchanges, said it would do a stock split, dividing each of its existing shares into five new ones. The split won’t increase ICE’s underlying value—slicing a pizza three or four times doesn’t make it bigger. But an old Wall Street rule of thumb holds that more shares with a lower price means a broader investor base. Retail investors can better afford a $60 stock than a $280 one.
That argument ought to resonate strongly. Share prices are near an all-time high. The average cost to buy a single share for a member of the S&P 500 index is now $88. But ICE is unusual. The incidence of stock splits is near an all-time low. In the past decade only 3% of S&P 500 firms each year split their shares, compared with 13% in the 1980s.
Several factors explain the decline. The more companies finance themselves with debt, and the less equity they raise, the less they care about whether their shares are bite-sized. Today equity raising in America is at subdued levels.
The proportion of the American stockmarket that is owned by large institutions—as opposed to retail punters—has more than doubled since 1980 to 70%. They are indifferent to paying $60 or $600 for a security.
And more bosses seem to have bought into Warren Buffett’s view of stock splits. They attract low-quality, short-term speculators, the famed investor has long argued. He only reluctantly issued a new class of Berkshire Hathaway B-shares in 1996 to let small investors in and split those in 2010 because of an acquisition. Berkshire’s B-shares trade at $145, while its A-shares are the most expensive of any public firm, at $218,000 a pop.
So, when Facebook, a social network, splits its stock in the nearish future—approved in June by its shareholders—it will not signal a revival. It says it is creating class-C shares, without voting rights, to ensure that Mark Zuckerberg can maintain long-term control of the firm.
Indeed, the main fans of stock splits these days are high-frequency traders, share exchanges and brokers, who like them because they lift trading volumes and boost their profits. American managers mostly appear to believe that their shares are already traded quite frequently enough, thank you—and have decided to quit the split.