scrip issue

Background

A scrip issue, commonly referred to as a “bonus issue,” occurs when a company allocates additional shares to its existing shareholders without any extra cost, based on the proportion of shares they already hold. It is a mechanism through which companies can return a part of their profits in the form of additional equity rather than cash.

Historical Context

Traditionally, companies have returned profits to shareholders through cash dividends. However, during periods when preserving cash flow is essential or when the company aims to strengthen its equity base, issuing additional shares can be more prudent and beneficial both for the company and its shareholders. This practice has been prevalent since the early 20th century and continues to be a common corporate action.

Definitions and Concepts

Scrip Issue (Bonus Issue)

A scrip issue or bonus issue is the process by which a company issues additional shares to its current shareholders in proportion to their existing holdings. This is typically done from the company’s reserves or retained earnings. The primary objectives might include rewarding shareholders, increasing the liquidity of the shares, or adjusting the capital structure.

Major Analytical Frameworks

Classical Economics

Classical economic theory typically pertains to broader economic forces and might not delve deep into corporate actions like scrip issues. However, classical views might analyze the role of such practices in signaling a healthy, profit-generating company.

Neoclassical Economics

Neoclassical economics, focusing on the equilibrium between supply and demand and the rational behavior of agents, would look at how a scrip issue might affect shareholder wealth, market perceptions, and the overall value allocation on the stock market.

Keynesian Economics

Keynesian economics primarily addresses macroeconomic factors and might review the aggregate implications of such corporate practices in terms of financial stability, economic growth, and shareholder consumption.

Marxian Economics

Marxian analysis would probably scrutinize a scrip issue for its impact on capital accumulation and class relations. Bonuses might be viewed either as a means to enhance shareholder value at the cost of worker-owned stake redistribution or as a practice aligning shareholder and worker interests within large capitalistic firms.

Institutional Economics

Institutional economics might examine the institutional rules, corporate governance, and regulatory frameworks that facilitate scrip issues, questioning how these aspects influence long-term corporate performance and shareholder relations.

Behavioral Economics

Behavioral economists would assess how a scrip issue impacts investor sentiment and behavior. For example, they might study whether additional shares lead to perceived growth in wealth or affect the psychology of trading among retail and institutional shareholders.

Post-Keynesian Economics

Post-Keynesians might explore the function of scrip issues in the corporate finance arena, focusing on financial stability and the implications for investment confidence and aggregate demand. They may also critique the real utility versus investor perception alignment.

Austrian Economics

Austrian economists, relating more to individual decision-making and market phenomenon, might appraise the informational value of a scrip issue and how it reflects real economic decisions, subjective values, and preferences of both corporates and shareholders.

Development Economics

In developing economies, where corporate finance can display various growth stages, scrip issues play a role in financial strategy, catering to increasing investment capabilities and fostering shareholder loyalty for futuristic strategic goals.

Monetarism

Monetarists would concentrate on money supply and inflationary aspects, intensely examining whether a scrip issue, by increasing the volume of shares, tangentially relates to monetary aggregates influencing the broader economic conditions.

Comparative Analysis

With contrasting rationales, applications, and results across different economic frameworks, scrip issues function diversely in several econometric climates. Analysts study the collective effects such issues may bear in different parts of the economy ranging from corporate finance to national market flourishment.

Case Studies

Company Alpha (2020): Enhanced shareholder value through consecutive bonus issues, leading to increased stock liquidity.
Beta Corp (2018): Faced shareholder dilution critique despite substantial initial share price surge post-bonus distribution.
Global XYZ (2019): Boosted investor confidence significantly, translating into long-term strategic investments and prolonged stock performance upticks.

Suggested Books for Further Studies

Corporate Finance: The Core by Jonathan Berk and Peter DeMarzo.
Financial Markets and Institutions by Frederic S. Mishkin and Stanley G. Eakins.
Principles of Corporate Finance by Richard A. Brealey and Stewart C. Myers.

Bonus Issue: Synonym for scrip issue, implicating allocation of additional shares from reserves without cost to shareholders.
Dividend Reinvestment Plan (DRIP): A program allowing shareholders to reinvest cash dividends in additional shares automatically.
Shareholder Equity: Represents ownership percentage held by shareholders relative to total outstanding stock.