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Why did the Montanaro European (MTE) share price crash 90%?

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The Montanaro European Smaller Companies Trust (LSE:MTE) share price fell by 90% following a stock split. Management had previously announced its intentions to take such action in the annual report published in June earlier this year.

The Details

The executed stock split saw existing investors receive 10 additional shares for every one already owned. This decision has no direct impact on the overall market capitalisation of the company. But as the total number of shares outstanding is now 10 times higher, each existing share is worth 10 times less. Thus triggering the 90% drop in the MTE share price. It’s worth noting that this plunge may not be visible on some historical price charts, as often these display split-adjusted prices.

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Stock splits do not provide any immediate financial advantage for an underlying business. However, the drastic reduction in the MTE share price does allow the stock to become more accessible to investors with smaller amounts of capital.

The argument provided by Montanaro’s management team on recommending the split was that it “may increase the attractiveness of the company’s shares to potential investors and increase the liquidity in the market for the shares”.

The MTE share price has its risks

What’s next for the share price?

Montanaro European Smaller Companies Trust does exactly what it says on the tin — it’s a trust focused on smaller companies in Europe. The performance of the group ultimately depends on the underlying growth of the businesses it has a stake in.

The improved market liquidity provided by a lower share price may have some short-term benefits. But over the long term, any positive effects will likely be negligible for the company itself. 

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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