What it means
Some companies issue shares with a par value, a nominal amount printed on the share certificate. Others issue no-par shares, and in many places the board must set a stated value for them.
That stated value decides how much of the money received goes into the common stock account and how much goes into additional paid-in capital, which is the extra paid above the stated figure. Stated value has no link to what the shares trade for.
A share with a stated value of $1 could sell for $40 in the market. The stated value just determines how the proceeds are split between two lines in the equity section of the balance sheet.
The practical effect is on legal capital. In many jurisdictions, the stated capital of a company is the amount that cannot be paid out to shareholders as dividends, so it protects creditors.
A higher stated value therefore locks more of the company's equity in place. Preferred shares can also carry a stated value, which is typically the base amount on which a fixed dividend rate is calculated and the amount returned to the holder in a liquidation.
A preferred share with a $100 stated value and a 6% dividend pays $6 per share each year. Here the stated value acts much like the par value does on a bond.
The rules differ by country and by state, so the exact treatment should always be confirmed with local law and the company's constitution. The general principle holds, though: stated value is a bookkeeping and legal figure, not an indicator of worth.
Outside share capital, people sometimes use the phrase more loosely for the value a company declares for an asset, shipment or contract, for example on customs paperwork or an insurance schedule. In that sense it is simply the figure the parties have agreed to use, and it may differ from fair value or replacement cost.
It is worth asking which meaning is in play whenever the phrase appears in a document.
In practice
Real-world examples.
Example
A start-up issues 500,000 no-par shares at $10 each, with the board setting a stated value of $1. The accountant records $500,000 in common stock and $4,500,000 in additional paid-in capital. Total equity raised is $5,000,000, so only the split is affected by the stated value.
Example
An industrial company has preferred shares with a stated value of $50 and a 4% dividend. Each year it must pay $2 per share before ordinary shareholders receive anything. The CFO uses the stated value to forecast the fixed preferred dividend bill.
Example
An investor reading a bank's balance sheet notices common stock of only $12,000,000 against a market capitalisation of $3,000,000,000. A colleague explains that the small figure just reflects a low stated value, and tells him to look at total shareholders' equity instead.
Formula
Calculation
Common stock account = number of shares issued x stated value per share
Additional paid-in capital = total proceeds - common stock account
Suppose a company issues 100,000 no-par shares with a stated value of $2 per share, selling them for $25 each. Proceeds are 100,000 x 25 = $2,500,000. The common stock account is 100,000 x 2 = $200,000. Additional paid-in capital is 2,500,000 - 200,000 = $2,300,000.Case study
Seen in the real world.
Oakridge Components is an illustrative, fictional manufacturer preparing to raise capital. Its board debated whether to set the stated value of its new no-par shares at $1 or $5.
The finance director showed that on an issue of 1,000,000 shares at $20, a $5 stated value would put $5,000,000 into common stock, while a $1 value would put only $1,000,000 there. The remaining amount in each case would go to additional paid-in capital, so the total equity was identical.
The difference mattered because the lender's loan terms restricted dividends to the part of equity above stated capital. The board chose the $1 figure, keeping more flexibility to pay dividends later, and the illustrative lesson is that a small bookkeeping choice can have real legal effects.
Watch out
Common mistakes.
- Treating stated value as the market price or intrinsic worth of a share, when it is only an accounting allocation.
- Confusing stated value with par value, when par is set in the company's charter and stated value is set by the board for no-par shares.
- Assuming a higher stated value raises the total capital raised, when it changes only how the proceeds are divided within equity.
Questions
People also ask.
Does stated value affect how much cash the company receives?
No, cash received depends on the issue price, and stated value only decides the accounting split.
Why do companies bother with a stated value at all?
Corporate law in many places requires a minimum legal capital figure to protect creditors, and stated value provides it for no-par shares.
Can stated value be changed later?
It can usually be altered by a board resolution or shareholder approval, subject to local law and any restrictions in the company's articles.
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