capital stock issued in exchange for assets with a fair market value less than its par or stated value. In this manner, assets are recorded at overstated values. This practice is illegal if the board of directors acted in bad faith or fraudulently with respect to knowledge of such circumstances surrounding the issue.
stock issue offered to public investors by founders and promoters of a company at a greatly inflated price compared to book value or cost; stock a company issues for property that is worth less than the stock. The term was possibly derived from the cattle industry, where the animals were encouraged to drink water before being weighed for sale.
stock representing ownership of overvalued assets, a condition of overcapitalized corporations, whose total worth is less than their invested capital. The condition may result from inflated accounting values, gifts of stock, operating losses, or excessive stock dividends. Among the negative features of watered stock from the shareholder's standpoint are inability to recoup full investment in liquidation, inadequate return on investment, possible liability exceeding the PAR value of shares, low market value because of poor dividends and possible adverse publicity, reduced ability of the firm to issue new stock or debt securities to capitalize on growth opportunity, and loss of competitive position because of the need to raise prices to provide a return acceptable to investors. To remedy the situation, a company must either increase its assets without increasing its tanding shares or reduce outstanding shares without reducing assets. The alternatives are to increase retained earnings or to adjust the accounting values of assets or of stock.
