BONUS SHARES (STOCK DIVIDEND) AND STOCK (SHARE) SPLITS
An integral part of dividend policy of a firm is the use of bonus shares and stock splits. Both involve issuing new shares on a prorate basis to the current shareholders while the firm’s assets, its earnings, the risk being assumed and the investors percentage ownership in the company remain unchanged. The only definite result from either a bonus share or share split is the increase in the number of shares. outstanding. Table illustrates their effect on the capitalization of the firm. Part one of the table shows the equity of the balance sheet before the bonus issue and part two after the issue. The effect of share splits is shown in part three.
Effect of Bonus Shares and Share Splits
From Table, it is clear that a share split is similar to bonus issue from the economic points of view though there are some differences from the accounting point of view. In the equity portion of the firm, a bonus issue reduces the retained earnings and correspondingly increases paid up equity and share premium, if any, whereas stock share split has no such effect. The economic effect of both is to increase the number of equity shares outstanding.