A survey of chief financial officers of New York Stock Exchange firms reveals that the principal motive for issuing stock dividends is the belief that it increases the number of shareholders in the firm. Officers of firms paying stock dividends argued that increasing the number of shareholders makes the stock more attractive and eases selling of new equity. Officers of firms that don’t pay stock dividends rejected both arguments, and indicated that cost was one of the two most important factors behind their decision not to issue stock dividends: A growing number of institutional investors are eliminating from their portfolios those stocks paying frequent stock dividends because the handling cost makes these stocks unattractive.
Officers of dividend paying firms also argued that stock dividends reduce shareholders’ taxes. Actually, the shareholder who sells a stock dividend is doing nothing more nor less than selling part of his original ownership—an option available to him with or without a stock dividend.
Although endorsed by both groups, the notion that issuing stock dividends conserves cash is mistaken; stock dividends will conserve cash only if they are replacing cash dividends. Of the 80 firms in the sample who paid stock dividends in the year of the survey, only four reduced their cash dividends.
Both paying and non-paying officers felt that stock prices would not fully adjust to occasional stock dividends, even though the evidence on stock splits and large stock dividends suggests that full price adjustment does occur. It appears some corporate financial officers have not read the financial literature relating to stock dividends.