Corporate Actions - Accounting Materials

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1. Corporate Actions Overview

  • Corporate Actions refer to events initiated by a corporation that have an impact on its shareholders and creditors.

  • These actions can affect a single security or multiple securities issued by the corporation.

  • Corporate Actions apply to both equity and debt securities, with variations in the types of actions for each.

  • They can be categorized as either mandatory or voluntary. Mandatory actions involve no choice for security holders and often occur automatically. Voluntary actions allow security holders to decide on their participation and may require some action on their part.

  • To check corporate actions, you can use Bloomberg, for instance, by typing "IBM Equity <GO>CACS <GO>" to access historical corporate actions for IBM Equity.

2. Types of Corporate Actions

2.1 Cash Dividend

  • Dividends are distributions of a company's earnings to its shareholders and are declared by the board of directors.

  • There are three key dates for dividends: Announcement Date, Ex-Dividend Date, and Payment Date.

  • The Announcement Date is when the company declares the dividend amount.

  • The Ex-Dividend Date is when a security is traded without entitlement to the declared dividend.

  • The Payment Date is when the dividend is paid to shareholders.

2.2 Stock Dividend

  • Stock dividends are paid as additional shares rather than cash.

  • They are also known as "scrip dividends" and may have different tax implications than cash dividends.

  • Stock dividends can be used to make shares more affordable to small investors.

2.3 Stock Split and Reverse Stock Split

  • A stock split increases the number of outstanding shares, often making them more affordable to investors.

  • A reverse stock split reduces the number of outstanding shares, typically to prevent delisting or gain market respectability.

  • Both actions affect the stock's price and market capitalization but not its underlying value.

2.4 Spin-offs

  • A spin-off occurs when a company separates a part of its business into a new subsidiary and distributes shares of that subsidiary to its shareholders.

  • The balance sheet of the spin-off company inherits the historical cost of assets and liabilities transferred.

  • Reasons for spin-offs include disposing of problematic subsidiaries and reducing parent company debt.

2.5 In Default

  • In the context of fixed income securities, a company is in default when it cannot meet its periodic interest payments.

  • Bloomberg alerts for default information in public companies.

2.6 Rights Offering

  • Companies issue rights to current shareholders, allowing them to purchase additional shares, often at a discount, to finance special projects.

  • Rights can be transferable and are common in closed-end funds.

2.7 Dissolution/Re-Organization/Merger/Acquisition

  • This category includes various actions related to corporate restructuring, often occurring during financial distress or mergers and acquisitions.

  • Chapter 7 and Chapter 11 bankruptcy are options for financially distressed companies.

  • Delisting and liquidation follow bankruptcy.

  • Successful restructuring can lead to relisting and changes in equity and debt structures.

2.7.4 Merger and Acquisition

  • Acquiring companies announce proposed deal terms to shareholders.

  • Shareholders may receive cash, stock, or a combination of both in M&A deals.

  • After completion, target company shares are replaced with the acquiring company's shares or cash, depending on the terms of the deal.

This rewritten version provides a concise overview of corporate actions and their types, making the information more accessible and understandable.

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