Splitting companies: beneficial for shareholders or not?

BNR Nieuwsradio
Erasmus School of Economics

Under pressure from activist shareholders, companies are splitting up, but what does this actually mean for the investor? In an interview with BNR Nieuwsradio, Mary Pieterse-Bloem, Professor of Financial Markets at the Erasmus School of Economics, explains what effect a split-up has on the market value of these companies.

They are often old companies, where this trend occurs more often. What you often see in these types of old companies is that the activities are extremely diverse', Pieterse-Bloem says. Profitability is poor, management is unconvinced and they have a lot of fat on their bones. But the most interesting question is, of course, what does splitting up actually yield?

To answer this question, Pieterse-Bloem looked at three different companies: Toshiba, Johnson & Johnson and General Electric. If you then look at what the shares do after splitting, you do see that there is enormous underperformance, but you cannot say that it ends in an enormous outperformance of the world index, because even after splitting, those shares still lag behind a little.' Another study with a much larger sample found that initially the value of the stock skyrockets, but that effect wears off after a few years and then actually disappears. The long-term effect is then no longer there for investors.

 

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The full item from BNR Nieuwsradio, 23 November 2021, can be found here (in Dutch). 

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