Although stock splits do not add any value to the firm, investors tend to react positively to stock splits because management isn't likely to initiate a stock split if the firm's prospects are poor.

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Investors tend to see stock splits as a positive signal of the firm's prospects, as management is unlikely to initiate a split if they do not believe the company is performing well. However, it is important to note that a stock split does not inherently add value to the firm; it simply splits existing shares into smaller ones, decreasing the price per share while increasing the number of outstanding shares.

Although Stock Splits Do Not Add Any Value to the Firm