Page 148 in the Corporate Finance book states: “By shifting retained earnings (equal to the market value of additional stock being distributed) to the capital account, a stock dividend merely reclassifies certain amounts of shareholder’s equity on the balance sheet, whereas a cash dividend represents a cash outflow [which reduced shareholder’s equity.]” I understand the second part, however, it’s not apparent to me that a shift in retained earnings take place in a stock dividend. I thought that the market cap, *all* financial ratios, par value, etc. doesn’t change, and that a stock dividend was just a way to reduce the price per share of a stock. How does this shift retained earnings? Another words, the previous page demonstrates that nothing changes in stock dividend, except the price of a share changes (the book value of the company and market cap is same).
Retained earnings are accounted for under the Shareholder Equity heading; common stock is listed under another “heading” on the balance sheet, Common Stock. Both are listed under “Shareholder’s Equity”.