War-time financial problems

A PLEASANT DELUSION 155

But since, as has been shown, capitalisation of
reserves has no effect upon the earning power and
assets of the company, it is interesting to try and
discover why the rumour and announcement of such
an intention on the part of the board of directors is
nearly always accompanied by a rise in the shares
of the company affected. If the shareholder is
merely to be given a larger nominal claim, which
does not in the least affect the value of the assets
which that claim concerns, and if the relative
amount of his claim is exactly the same with regard
to the other shareholders, it is clear that the rise
in the value of the shares is based entirely either
on a psychological mistake on the part of the public
and its financial advisers, or on the fact that the
transaction called attention to the value of the shares
which have hitherto been undervalued in the market.
Probably the movement arises from both these
causes. A large number of people think they are
"better off if they have a larger nominal share,
without considering that all the other shareholders
are at the same time having their claim increased,
that the assets to which they all have a claim are
not being increased, and that, consequently, if a
sharing-out process were to take place they would
all be exactly as they would have been if no such
capitalisation of reservee had been carried out. And
if a sufficient number of people think that a share
or any other commodity is more valuable, it thereby
becomes more valuable, because value is nothing else
than the amount, whether in money or other com-
modities, at which a commodity can be disposed of.