Definition
Watered stock is an asset with an artificially-inflated value. The term is most commonly used to refer to a form of securities fraud common under older corporate laws that placed a heavy emphasis upon the par value of stock.
Watered Stock
What is ‘Watered Stock’
Stock that is issued with a value much greater than the value of the issuing company’s assets. Watered stock can be caused by excessive stock dividends, overvalued assets and/or large operating losses.
Explaining ‘Watered Stock’
Assets can be overvalued for several reasons, including inflated accounting values or excessive issue of stock (through a dividend or employee stock-option program). This term is thought to originate from ranchers who would feed their cattle large amounts of water before market day to make them heavier, fetching a price higher than their worth.
Further Reading
- The stock watering debate: more light, less heat – www.tandfonline.com [PDF]
- The success of industrial mergers – academic.oup.com [PDF]
- The role of stock dividends in defining income, developing capital market research and exploring the economic consequences of accounting policy decisions – meridian.allenpress.com [PDF]
- Inflated Corporate Capitalizations and Diluted Property Rights – heinonline.org [PDF]
- Financial disclosure on the internet and overvalued equity: the case of Iran – www.inderscienceonline.com [PDF]
- Regulation of Stock Trading: Private Exchanges vs. Government Agencies-Commentary – heinonline.org [PDF]
