Role of stock dividends in defining income, developing capital market research and exploring the economic consequences of accounting policy decisions

              The Accounting Historians Journal Vol. 12, No. 2 Fall 1985
James J. Tucker, III DREXEL UNIVERSITY
THE ROLE OF STOCK DIVIDENDS IN DEFINING INCOME, DEVELOPING CAPITAL MARKET RESEARCH AND EXPLORING THE ECONOMIC CONSEQUENCES OF ACCOUNTING POLICY DECISIONS
Abstract: Allegations that stock dividends serve as a vehicle for deceptive finan-cing, evasion of taxes, misleading financial reporting, and stock market manipu-lation resulted in legislation that prohibited their use in the United States in the latter part of the 19th century. In the 20th century, efforts of the Supreme Court to determine the economic substance and taxability of stock dividends catalyzed a pioneering effort by the Court to define income within the 16th Amendment. As early as 1930 market reactions to stock dividends were investigated; this may have been one of the earliest forms of capital market research. This paper examines the effects of stock dividends on the development of accounting.
Current accounting standards require all pro rata free stock dis-tributions of less than 20-25% of outstanding shares to be character-ized as stock dividends and a transfer of retained earnings to the paid-in capital accounts.1 The amount of the transfer (capitalization) should be the market value of shares issued, but legal requirements (usually par or stated value) represent the minimum amount to be capitalized. Stock distributions in excess of 20-25% should be characterized as stock split-ups (splits), with no transfer of retained earnings to paid-in capital accounts. However, in cases where legal regulations require capitalization of retained earnings for distri-butions in excess of 20-25%, the standard recommends only the legal minimum be capitalized (usually par or stated value) and that the distribution be characterized as a "split-up effected in the form of a dividend".2
English Law
Stock dividends have been a controversial issue for over 100 years though they date back to at least 1690, when the Hudson Bay
The author gratefully acknowledges the useful comments of Stephen Zeff on an earlier version of this paper, as well as his assistance in obtaining the letters of George O. May.