Accumulating Shares - Explained
What are Accumulating Shares?
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Table of ContentsWhat are Accumulating Shares?How do Accumulating Shares Work? Academics Research on Accumulating Shares
What are Accumulating Shares?
Accumulating Shares refer to common shares that shareholders of a company receive in addition to a dividend or instead of a dividend. Shareholders receive accumulating shares in the form of common stock so that they can avoid paying income tax on distributions received in the current year. Despite that shareholders use this technique to avoid paying income tax, capital gains tax must still be paid on shares. Accumulating shares can otherwise be called stock dividends. It can be paid by companies after cash dividends have been given to shareholders.
How do Accumulating Shares Work?
Generally, investors make investments for regular income, hence, dividends are paid to shareholders in cash to sustain a regular income, except in certain cases. The decision of whether to pay cash dividends to shareholders or not is made by the board of directors of a company. When a company offers accumulating shares to its shareholders, this decision is due to a couple of reasons. For instance, the decision to pay accumulating shares might be made to preserve the cash on the company's balance sheet. In a bid to boost the liquidity of a company, accumulating shares can also be distributed to investors. Furthermore, mutual funds are characterized by accumulating shares, this is because investors can either receive their income as cash dividends or reinvest in the income and allow the return to accumulate.
Academics Research on Accumulating Shares
- Bank managers' opportunistic trading of their firms' shares, Jordan, J. S. (1999). Bank managers' opportunistic trading of their firms' shares. Financial Management, 36-51. Requiring managers to hold shares in the firms they manage can reduce agency problems. Despite the pivotal role of share ownership, little evidence exists concerning who determines the level of ownership, the compensation committee, or managers themselves. This differentiation is important, since timely trades by managers can weaken the role share ownership plays in reducing agency problems. I find that managers do not rely solely on the compensation committee, and that personal transactions are important. Exploiting private firm-specific information, managers make opportunistic trades that, in effect, increase the rate of return and reduce the riskiness of their investments in their firms.
- The reversal of large stockprice decreases, Bremer, M., & Sweeney, R. J. (1991). The reversal of large stockprice decreases. The Journal of Finance, 46(2), 747-754. Extremely large negative 10day rates of return are followed on average by largerthanexpected positive rates of return over following days. This price adjustment lasts approximately 2 days and is observed in a sample of firms that is largely devoid of methodological problems that might explain the reversal phenomenon. While perhaps not representing abnormal profit opportunities, these reversals present a puzzle as to the length of the price adjustment period. Such a slow recovery is inconsistent with the notion that market prices quickly reflect relevant information.
- The emergence of corporate governance in Russia, Puffer, S. M., & McCarthy, D. J. (2003). The emergence of corporate governance in Russia. Journal of World Business, 38(4), 284-298. This article tracks the emergence of corporate governance through four stages of the Russias transition to a market economy from the mid-1980s to the present: commercialization, privatization, nomenklatura, and statization. For each stage, the governments economic objectives are summarized, as well as the foundations for the development of and inhibitors to corporate governance. The problems of nondisclosure and nontransparency that made Russia one of the riskiest countries for investment are discussed. The article emphasizes the substantial progress made recently, culminating in the 2002 Corporate Code of Conduct. The article concludes with prospects for corporate governance to be considered by investors, including foreign executives and managers interested in direct investment in Russia.
- Reflections on insider trading, Rozeff, M. S. (1989). Reflections on insider trading. Financial Analysts Journal, 12-15.
- Managers' Opportunistic Trading of Their Firms' Shares: A Case Study of Executives in the Banking Industry, Jordan, J. S. (1997). Managers' Opportunistic Trading of Their Firms' Shares: A Case Study of Executives in the Banking Industry. Providing managers with stock in the firm may help ensure that managers act in the shareholders' interest. The level of managerial stock ownership, however, is not generally controlled by the firm's compensation committee. Rather, managers themselves determine the level of their stock holdings. To date, though, little evidence exists on managers' personal transactions and how these trades affect their overall equity holdings. This analysis provides insight on the trading practices of bank managers. I find that managers do not rely solely on the actions of a compensation committee to set their stock holdings. The assumption that managerial stock holdings are determined solely by the firm's compensation committee is shown to be inaccurate. I provide evidence that managerial open market purchases and sales are both primary determinants of the level of managerial stock holdings. I also show that managers alter their holdings in an opportunistic manner. In general, managers alter their stock holdings when their firm's prospects change. Managers consistently take advantage of private firm-specific information, earning positive abnormal returns on open market purchases while avoiding negative abnormal returns by making open market sales. Evidence suggests that opportunistic trading is most prevalent among managers who face the greatest exposure to their firm's nonsystematic risk. In general, managers appear to "fine tune" the proportion of their wealth that is sensitive to changes in firm value. In effect, this trading increases the rate of return and reduces the riskiness of holding those shares. This increased return/risk trade-off, available to managers who trade shares in their firms, may help explain why many managers are willing to hold what appears to be an undiversified stake in their firm.