After announcing the stock split, NVIDIA has risen by more than 27%. Goldman Sachs: It can attract more retail investors

Zhitong Finance APP noticed that NVIDIA (NVDA.US) will start trading at a 10-to-1 split ratio on Monday. Driven by strong earnings and guidance, the stock has risen over 27% since the split was announced.

Goldman Sachs stock analyst David Kostin stated, "In theory, when a company splits its stock, its fundamental value does not change. However, empirical research shows that stock split announcements generally have a positive effect."

The return rate of the 46 Russell 1000 Index companies that have completed stock splits since 2019 is 4 percentage points higher than the S&P 500 Index.

Kostin said, "However, after the stock split takes effect, the stock price does not show a significant reaction. Additionally, since many companies announce stock splits along with earnings reports, it is difficult to determine how much of the stock price increase is due to the split rather than strong earnings results."

One of the reasons stock splits can trigger a rise in stock prices is that splits make it easier for retail investors to buy shares.

Kostin mentioned, "Most recent stock splits have not led to a significant increase in retail trading activity, but there are some clear exceptions."

Comparing the average percentage of stock trading by retail investors in the six months before and after the stock split took effect, the overall share of retail trading activity for companies only increased by 0.2 percentage points.

Kostin added, "However, the gains for several mega-cap tech stocks were much larger. Amazon (AMZN.US) saw an average increase of 7 percentage points in retail trading share after its 2022 stock split (rising from 14% to 21%)."

"NVIDIA's previous stock split in 2021 led to a nearly 7 percentage point increase in its stock price (from 17% to 23%). With increased retail trading activity after the split, the post-announcement returns were also stronger."

Liquidity may also be a factor.

Kostin explained, "Academic theory suggests that stock splits help drive stock prices back to an 'optimal' balance, balancing high absolute prices (charging low commissions) with low prices (providing accessibility to small investors). In theory, this change will improve liquidity."

"From a signaling perspective, the theory suggests that stock splits are a way for management to convey positive information or an optimistic outlook for the company's future. Academic literature on the driving factors of stock split announcement effects is generally mixed."