P2STDIVPDFS04

P2STDIVPDFS04 - 1 STOCK DIVIDENDS AN ANALYSIS OF MANAGEMENT OBJECTIVES by Kenneth E Stone Professor of Accounting Roanld D Niemeyer Professor of

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STOCK DIVIDENDS: AN ANALYSIS OF MANAGEMENT OBJECTIVES by Kenneth E. Stone, Professor of Accounting & Roanld D. Niemeyer, Professor of Accounting Central Missouri State University INTRODUCTION The number of companies declaring stock dividends has decreased dramatically since the early 1960's. However, in a recent three-year period, a small (less than 70) number of companies listed on the New York and American stock exchanges have declared stock dividends. Stock dividends are currently on the decline; however, some corporations continue to use them. In order to gain some insight into the attitudes and opinions of managements, this paper compares the opinions of chief financial officers from companies which have recently declared stock dividends with those of chief financial officers of companies which have not. An understanding of stock dividends is important for accountants and financial officers in management positions who may be asked to provide information for the Chief Executive Officer and the Board of Directors regarding possible declaration of stock dividends. DEFINITION OF STOCK DIVIDEND In this discussion, "stock dividend" refers to any size proportional distribution of common stock to common shareholders which is accounted for by the transfer of retained earnings to paid-in capital. A stock dividend of less than 25% is small, and a stock dividend greater than 25% is referred to as large. A "stock split" is any size proportional distribution of common stock to common shareholders which is accounted for by reducing the par value of the stock instead of transferring retained earnings to paid-in capital. Using the terminology as defined above avoids any confusion from the arbitrary terminology in ARB No. 43 [1953] which refers to a stock dividend greater than 20-25% as a stock split effected in the form of a stock dividend. REVIEW OF LITERATURE Sussman [1962] asked corporate chief financial officers (in an open ended letter) why their corporations had declared stock dividends. The 77 replies indicated that stock dividends were declared to accomplish one or more of the following objectives: (1) Conserve cash (2) Increase cash dividends (3) Increase the number of shareholders--reduce stock price (4) Present evidence of the permanent retention of earnings (5) Give stockholders an option to invest or to liquidate (6) Maintain good public relations or improve them Sussman concluded that the primary reason for declaring stock dividends was to maintain good public relations, or improve them, with a few vocal stockholders. Eiseman and Moses [1978] surveyed chief financial officers of New York Stock Exchange companies and found the following objectives most frequently cited as reasons for declaring stock dividends: (1) Continuation of a historical company practice (2) To increase the number of shareholders of the corporation (3) To conserve cash (4) To enable management to express their confidence in the firm (5) To increase shareholder wealth because prices will not fully adjust downward in proportion to the additional shares
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This note was uploaded on 09/08/2010 for the course ACCT 3600 taught by Professor Stone during the Spring '10 term at UCM.

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P2STDIVPDFS04 - 1 STOCK DIVIDENDS AN ANALYSIS OF MANAGEMENT OBJECTIVES by Kenneth E Stone Professor of Accounting Roanld D Niemeyer Professor of

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