Under pressure from outside investors, including corporate raider Carl

QUESTION

Under pressure from outside investors, including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this action was immediately positive, with the stock price of USX increasing $2.37 to close at $31.25 on the day of the announcement. Why do you think this action by USX was so well received by the stock market?
In a stock split, a corporation divides its each share such that the amount of outstanding shares increases while the share price per share reduces. The total market capitalization remains the same. For Example, in a 2-for-1 stock split, each shareholder will have an additional share but the share price of each share will be reduced to half such that the shareholder will now have two shares for the original one share while the value of the investment remains the same. The share price of USX Corporation increased after the stock split because the share price of the corporation decreases which makes the share more affordable to the investors. Also, after the¦

ock split the liquidity of the stock increases which improves the ease with which investors can trade in the share. Generally, a stock split signals to the investors that before the split, the share price has been increasing and investors assume that such growth pattern will continue in the future which reassures the confidence of the investors in the company. This positive outlook has the impact of increasing the share price of the company.

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