Beyond Reverse Splits: How Do Fallen Angels Restructure?

Firms with very low stock prices face a unique set of frictions that affect trading and liquidity. We study the restructuring actions of firms whose stock prices experience a sharp decline to a low-price level – fallen angels. We find that, relative to a control sample, fallen angels implement more reverse stock splits. However, we find no significant relation between reverse splits and subsequent returns for fallen angels, and reverse splits are associated with negative future returns for control stocks. We therefore explore alternative restructuring actions and find that fallen angels cut investments in fixed assets and reduce employment more than control firms. Retrenching firms experience higher subsequent returns, but worse operating performance and higher asset volatility. Overall, our findings suggest that low-price firms must engage in actions beyond reverse splits to boost stock prices, and these actions are costly.