Financial Management: Core Concepts, Third Edition

17.4 Stock Dividends, Stock Splits, and Reverse Splits

A stock dividend is a payment of shares to current shareholders in which the payment is less than 25% of the currently held shares. For example, a 10% stock dividend means that a shareholder with 100 shares of stock will receive an additional 10 shares. With stock dividends, however, there is no real change in wealth. Only a paper transaction has occurred.

In a stock split, a company divides its existing shares into multiple shares, with the total dollar value remaining the same. When a company declares a 2-for-1 stock split, it is like changing a $20 bill into two $10 bills. In a stock split, the number of outstanding shares increases by the declared split ratio. The most common split is ...