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Originally Posted by CoachKandSportsguy
Ah, reverse splits. .. a friend of mine worked at the GE hqs in accounting, and would relate to me the issues with their accounting. He was let go due to finding too many negative issues in the accounting, forcing restatements for errors in accounting treatments.
Yes, they were cooking the books to keep the stock price up until the house of cards collapsed. The type of accounting is easy to manipulate for revenue, as service revenue under certain revenue recognition methods are highly subjective. Not the same as with product revenue where a unit sold has a price on the transaction.
So many mutual funds have limitations of the minimum dollar price for a stock to be purchased, as if the price per share indicates the quality of the stock. It does in a general sense, but there are always exceptions. Therefore when former blue chip companies collapse, they often have to perform reverse splits to maintain certain investability, as well as to minimize dividend cash flow hits with a minimum dividend. Maintaining a dividend has certain investment quality assigned, but if you look at large cap history,very few companies remain in the Dow Jones and the SP500 forever, as they lose to innovation, and make mistakes whereby competitors take advantage and surpass them.
Also, you might believe the fallacy of stock buybacks, and if you want to understand the fallacy, as I have been a beneficiary of them, you can search on my user name and find my explanation of how stock buy backs is really mgmt personally getting their hands on the cash within the company without paying any taxes. . . there are examples of very large blue chip companies have executives looting the cash balances through the stock buyback executive incentive programs with stock grants. . .
So you won't find these explanations from supporters of corporations and their plans, but you will from certain very critical of certain leaders with very credible evidence. . . there are also some finance theories which make sense, but are also abused in reality, as well as don't scale well from theory to reality.
finance guy
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Speaking of GE..........I ALWAYS HATED Jack Welsh. He was making $350 Million per year, many years ago. I thought to myself, that no human is worth that much money. GE stock seemed to me to stay the same for all the years that I owned some and Welsh was CEO. So, TO ME, he was worthless. I remember around that time, Welsh wrote a book that ALL the "would-be-Welshs" were raving about and having nocturnal sexual fantasies about - strange times, right out of the "Greed is Good" playbook. I also HATE COLLEGE FOOTBALL coaches the make 6 million today per year.
Speaking of the psychology of stock splits......you have the answer right there (and I know that you are aware of it) - psychology.......small UNINFORMED (in stock market knowledge) investors that inherited money like to think (even though not true) that the greater NUMBER of shares that they have the BETTER OFF they are. They feel that 10 shares at $10 are better than ONLY one share at $100. AND even the UNSOPHISTICATED investor often knows that for some reason (magic gremlins) that stock splits magically cause the stock price to rise.
Today's market IS kinda strange. There has been no real cycle downward in a long time, so evaluations have levitated and avoided gravity and reality. I have not been following either GE or the market lately. I moved to ETFs and bonds and stopped watching Wall Street Week or any business TV. So, the last time I saw GE mentioned, it was moving rapidly toward ZERO. Then, they did that reverse split and, I believe, hired another new CEO and it has come back. I am really guessing there. I remember back to OLD GE and WELSH - he did a longitudinal business integration rather than a VERTICAL integration ( which makes more sense to me). Welsh's longitudinal business got GE into far-flung and stupid businesses just to satisfy the huge EGO and AMBITION of said Jack Welsh. BIG MISTAKE by Welsh and GE - no wonder they then had to COOK the books. Post stupid Welsh, GE had to sell off all their longitudinal LOSER businesses and began their slow march toward stock price OBLIVION. Now if you want that WONDERFUL book by the LEGENDARY Jack Welsh - you can go to any THRIFT STORE and buy 3 of them for ONE DOLLAR. And so, another legend bites the dust!!!!!!!!!!