Why does a stock split affect the P/E ratio?

A stock split (also known as a share split) refers to a company increasing its existing shares proportionally (e.g., a 1:2 split turns 1 share into 2 shares) while proportionally reducing the stock price (e.g., from $100 to $50). However, the company's total market capitalization and fundamentals (such as total earnings) remain unchanged. The price-to-earnings (P/E) ratio is the ratio of the stock price to earnings per share (EPS), used to evaluate stock valuation. In theory, a stock split should not change the P/E ratio because the stock price and EPS adjust proportionally. However, it may "affect" the P/E ratio for the following reasons:

Apparent calculation changes:

After a split, the stock price immediately drops. If data sources (e.g., trading systems) do not update EPS promptly, the P/E ratio may appear to decrease or increase, creating a "false impact." For example, delayed EPS adjustments may temporarily distort the P/E ratio.

In actual trading, splits can affect market prices and share quantities, which may impact the real-time display of the P/E ratio, especially during pre-market or after-hours trading or when there are data delays.

Market psychology and liquidity effects:

After a split, the lower stock price may attract more retail investors, increasing trading activity and demand. This indirectly causes short-term fluctuations in the P/E ratio, as market sentiment may drive up the stock price (thus affecting P/E), even though the company's value remains unchanged.

Changes in liquidity (e.g., order execution issues) may also affect price discovery, thereby impacting the P/E ratio.

Long-term orders and calculation inaccuracies:

Corporate actions like stock splits terminate long-term orders and may lead to inaccurate cost basis calculations. If the P/E ratio is based on such inaccurate data (e.g., historical cost), it may display anomalies.

Summary: A stock split does not change a company's intrinsic value, so the P/E ratio should theoretically remain unchanged. However, in reality, due to data delays, market behavior, or system adjustments, it may exhibit short-term "effects." Investors should focus on post-split EPS updates and fundamentals rather than just superficial P/E ratio changes.