Report of the Special Committee on Stock Dividends. New York Stock Exchange;

              70 HASKINS & SELLS December
Report of the Special Committee on Stock Dividends
New York Stock Exchange
IN the requirements for the listing of
investment trusts recently promulgated
by the Stock Exchange, a provision was
incorporated to the effect that investment
trusts should not include stock dividends
in their income accounts. In recent weeks,
the wisdom of this ruling has been the sub­ject
of discussion between the Stock Ex­change
and representatives of many com­panies
affected by its operation, and a
special committee has been looking into
the question of stock dividends from the
point of view of the Exchange with a view
to clarifying the issues involved.
Based on the report of this committee to
the Governing Committee, the following
statement of position is made: The inter­est
of the Stock Exchange in the method
by which companies account for stock
dividends arises out of its consistent policy
of attempting to obtain, in connection with
corporate returns, such a clear disclosure
of the relevant facts as will enable the in­vestor
to properly appraise the listed se­curities
in which he is interested.
The stock dividend has, in late years,
become an important instrument in the
financial policy of American corporations,
and there can be little doubt that its use
is still in the early stages of development.
In particular is it of value to corporations
in growing industries requiring the use of
large additional amounts of capital, as it
permits them in some measure to obtain
this capital in the simplest manner from
their own stockholders, and, at the same
time, permits these stockholders, if they
are so inclined, to realize upon their share
of current or past earnings so capitalized.
Coincident with the development of the
stock dividend, there has taken place the
development of the less than $100 par and
of the no par value stock, together with
the practice of having large capital or paid
in surpluses; and these relatively new con­ceptions
have led with increasing fre­quency
to the corporate practice of partial
or complete recapitalization through the
form of so-called "split-ups."
As a matter of definition from the point
of view of the Exchange, a true stock divi­dend
represents the capitalization, in whole
or in part, of past or current earnings;
while a split-up has not of necessity any
relation to earnings and may mean nothing
more than a change in the form in which
ownership in an existing situation is ex­pressed.
Accounting practice, in striving to adapt
itself soundly to these important develop­ments
in corporate procedure, has not yet
reached the point where a mere perusal of
the year's accounts will suffice to reveal
to the average investor in what manner he
has been affected by action taken during
the year in the matter of stock dividends.
On this account, it is felt that the Ex­change
is justified in seeking to obtain
wherever possible for the benefit of the
investor such supplementary information
as may assist him to a correct understand­ing
of the accounts themselves.
Applications for listing which involve
questions relating to stock dividends will
be considered in the light of the foregoing.
In view of the large and constantly in­creasing
number of listings on the Ex­change,
either originating in stock divi­dends
or involving questions that have to
do with stock dividends, an effort will be
made to obtain for the investor such infor­mation
as may place him in the position
to determine in connection with stock
dividends received by him, to what extent
they constitute true stock dividends rep­resenting
the capitalization of current or
past earnings, and to what extent, if at
all, they represent merely split-ups in-volving
an expression in a new form of
what was already his. In any event, it
is felt that the individual investor should
make such independent investigations as
seem desirable in order to be quite sure
that he understands in each instance how
he has been affected by the declaration of
a stock dividend.
When stock dividends are received by
investment trusts, holding companies or