Recently many issuers announce the sharing of stock dividend or bonus shares. It should be noticed that stock dividend has different impact on investors.

Stock dividend gives the illusion that the financial condition of the issuer is sound which allows it to pay out dividends. This actually only happens in the payment of cash dividend, in which the company must pay out cash. The payment of cash dividend gives a positive signal to investors as the company manages to earn cash mainly coming from operational activities. On the other hand, the company does not transfer value to the investors. Consequently the company does not need any efforts to share stock dividend.

Stock dividend sharing involves 'false' accounting . The accounting record involved in the cash dividend includes the deduction of cash balance and deferred profit balance.In other words, there is a deduction of assets and equity of the owner in the company's balance sheet. But the accounting record in the stock dividend includes the transfer of the owner's equity accounts. Here the deferred profit balance is deducted and the share capital balance is added. Since these two accounts are the accounts in the owner's equity, there is no change in the owner's equity or assets in the company's balance.

Therefore investors should be aware of an issuer that shares bonus stock, as the issuer may cover its internal problems by disclosing false information on the sound condition of the company to the investors. The impact of the bonus stock on investors is the same as stock split. You can read the Ask Samuel article Ask Samuel for further details on this matter.

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