Capital adjustment Theory of treasury stock;Haskins & Sells Bulletin, Vol. 15 (1932);

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VOL. XV (QUARTERLY) NEW YORK, JANUARY, 1932 No. 1
The Capital Adjustment Theory of Treasury Stock
(An educational inquiry into the application of the theory, and obviously not a pronouncement
of firm policy.)
TREASURY stock of a corporation is
capital stock acquired by the corpora­tion
subsequent to its original issuance. If
acquired in exchange for a consideration,
the transaction results in a reduction of capi­tal
in an amount equal to the money-value
of the consideration given for the stock.
Capital stock outstanding is a representa­tion
that there is capital in the enterprise
equal in amount to the par value or the
stated value of such stock. Treasury stock,
acquired in exchange for money considera­tion,
is an admission that capital has been
withdrawn from an enterprise. A sale of
treasury stock results in an increase of capi­tal
equal in amount to the money-value of
the consideration received for the stock.
In presenting this view of treasury stock
for the purpose of discussing the effect on
capital when a corporation buys and can­cels,
or buys and resells, shares of its own
capital stock, it is necessary to establish
concepts of capital, business capital, and
legal capital, and to differentiate the two
latter terms. In attempting to do so, it is
the intention to make the definitions apply
to amounts as invested originally by pro­prietary
interests, regardless of any subse­quent
effects produced upon such amounts
by profits or losses. The novelty of the capi­tal
adjustment theory makes necessary
more detailed exposition and illustration
than ordinarily is required.
Capital, in a business sense, is an ab­stract
term used to denote the value, ex­pressed
in dollars, of the consideration
transferred from one party to another in
exchange for an interest in a business enter­prise.
Because it is possible to use the term
"capital" in an abstract manner, it is possi­ble
to think and talk about capital, as a
sum, without having to specify constantly
the concrete representations of value in­volved.
One may speak of capital as hav­ing
been invested, or increased, or de­creased,
and mean thereby a sum of dollar-values,
without particularizing the objects
in which the values are embodied. Such is
the manner in which the term is used in this
discussion.
The business capital of a corporation is
the value, expressed in dollars, of the con­sideration
received by the corporation in
exchange for the certificate of share-inter­est
which it issues. If a corporation has re­ceived
$125.00 for a certificate of share-interest,
it has received that much business
capital.
The legal capital of a corporation is the
amount, expressed in dollars, of the par or
of the stated value of its certificates of
share-interest, which the corporation repre­sents,
through its capital stock account, to
be outstanding. If a corporation receives