The Valuation Effects of Stock Splits and Stock Dividends by Mark Grinblatt, Ronald W Masulis, Sheridan Titman :: SSRN

stock dividend vs stock split

A cash dividend is one in which the company distributes a definite amount of money to each shareholder for each share owned. On the other hand, a stock dividend is obtained from distributable equity in the form of stock. With a scrip dividend, the shareholder has the option of receiving the dividend in the form of cash or additional shares. Recording small stock dividends law firm bookkeeping A stock dividend of less than 20 to 25% of the outstanding shares is a small stock dividend and has little effect on the market value (quoted market price) of the shares. Thus, the firm accounts for the dividend at the current market value of the outstanding shares. Stock dividends do not affect the individual stockholder’s percentage of ownership in the corporation.

stock dividend vs stock split

Stock dividends are recorded by moving amounts from retained earnings to paid-in capital. A small stock dividend (generally less than 20-25% of the existing shares outstanding) is accounted for at market price on the date of declaration. A large stock dividend (generally over the 20-25% range) is accounted for at par value. The composition of the shareholder’s equity is changed in the case of a stock dividend. It is because it leads to the transfer of a proposition of retained earnings to paid-up capital. In reality, it distributes the company’s general reserves into the share capital of the company.

Related Differences and Comparisons

In other words, they prefer to have the price of a share trading between $40 and $50 per share. If the market price of the stock rises to $80 per share, the board of directors can move the market price of the stock back into the range of $40 to $50 per share through a 2-for-1 stock split. If the event is a stock split, there is no change in either Retained Earnings or Common Stock, only a decrease in par value and an increase in the number of issued and outstanding shares. The end result is a doubling, tripling, or quadrupling of the number of outstanding shares and a corresponding decrease in the market price per share of the stock. This price decrease is the main reason that a corporation decides to split its stock. The stock dividend increases the number of shares outstanding, just as a stock split does.

stock dividend vs stock split

Because there are 10% more shares outstanding, each share should drop in value. A stock split is a corporate action in which a company increases the number of outstanding shares by dividing its existing shares into multiple shares. The purpose of a stock split is to make the shares more affordable and increase their liquidity. The split is usually expressed as a ratio, such as 2-for-1 or 3-for-1, which means that each existing share is divided into two or three new shares, respectively.

Difference between Stock Dividend and Stock Split

Stock splits occur when companies increase their total number of shares outstanding, but the overall value of all their shares remains identical. As a result, splits give each shareholder more shares, but they also proportionally lower the value of each share. If new shares issued exceeds 25% of the total number of shares outstanding prior to the stock dividend, this is classified as large stock dividend. E.g. Company N decides to offer a stock dividend where shareholders receive an additional share for every 25 shares held.

As a result, the outstanding number of shares increase; however, there will be no change in the total value of shares since the split does not result in cash consideration. A stock dividend is considered to be small if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend. Talking about stocks and shares is always a complex topic to understand and discuss.

Financial Accounting

The payment is intended as a reward to shareholders and is made with the assumption that the stock price will continue to rise and the stockholders will reap the rewards. With this new number of shares outstanding, the company’s market cap remains the same, but the share price will decrease to $3.13 ($750/240). In the case of a stock dividend, regardless of the percentage of distribution, the distribution of the dividend takes place through the transfer of such amount from free reserves to paid-up share capital.

  • Apple has split its stock four times since it began operations.
  • A stock split is the process of subdivision of the outstanding stock units, with no change in the paid-up share capital.
  • This is because it results in the transfer of the part of retained earnings to paid-up capital.
  • These events are usually non-taxable, but change the number of shares you own and the basis of those shares.
  • This indicates that the business provides them free of charge.
  • However, when financial statements are issued, the information regarding the stock split and the new par value per share must be disclosed.

Since the same company is now represented by more shares, one would expect the market value per share to suffer a corresponding decline. For example, a stock that is subject to a 3-1 split should see its shares initially cut in third. The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares. Stock dividend and stock split are two aspects that are confused easily due to many similarities between them.

Example: Disclosure of Stock Split

Conceal the large profit distribution as with the stock split, per share earnings fall. Also, provide a basis for an exchange in the event of a merger. A Stock Split occurs when a company increases the number of outstanding shares with a proportional decrease in the par or stated value. The reasoning behind the approach is that it does not alter the total amount of paid-in-capital or retained earnings and thus more clearly reflects the split nature of the stock dividend.

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  • The number of shares outstanding would increase to 240 million (200 x 1.2), and the market price would be diluted to $3.13.
  • The 2-for-1 stock split will cause the quantity of shares outstanding to double and, in the process, cause the market price to drop from $80 to $40 per share.
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  • Thus, when looking at the charts it will seem as if the price was always $25.
  • A bonus issue is, in essence, the issuance of additional shares by the corporation as a reward to the current owners without charging a premium.

However, every stockholder’s number of shares has doubled—causing the value of each share to be worth approximately half of what it was before the split. If a corporation had 100,000 shares outstanding, a stockholder who owned 1,000 shares owned 1% of the corporation (1,000 ÷ 100,000). After a 2-for-1 stock split, the same stockholder still owns just 1% of the corporation (2,000 ÷ 200,000). Before the split, 1,000 shares at $80 each totaled $80,000; after the split, 2,000 shares at $40 each still totals $80,000. The current year’s EPS is calculated based on the number of common shares after any stock dividends and splits. From the investor’s viewpoint, each stockholder receives two additional shares for each share owned.