What is the difference between a stock dividend and a stock split, and how does each affect share price?

Stock dividends and stock splits both increase shares outstanding without directly changing the total market value of equity, but they differ in mechanics and accounting.

Stock Split (e.g., 2-for-1):

• Every existing share becomes two shares
• Share price is halved; total market cap is unchanged
• Par value per share is halved
• No journal entry needed — just a memo noting the split
• Example: Birchwood Holdings has 1 million shares at $120. After a 2:1 split → 2 million shares at $60.

Stock Dividend (e.g., 10%):

• Company distributes additional shares as a percentage of existing holdings
• If you hold 100 shares, you receive 10 new shares
• Share price adjusts downward proportionally
• Accounting differs from a split: retained earnings are reduced and common stock / APIC are increased
• Example: Birchwood Holdings declares a 10% stock dividend. 1 million shares → 1.1 million shares. Price adjusts from $120 to $120 / 1.10 = $109.09

Key Differences:

Why companies do it:

• Stock splits make shares more affordable and improve liquidity — a $500 stock split 5:1 becomes $100
• Stock dividends signal confidence without paying cash, and small stock dividends (under 20-25%) are valued at market price in the journal entry

Exam trick: A large stock dividend (over 25%) is accounted for the same way as a stock split — at par value rather than market value. The CFA curriculum draws this line at 20-25% depending on jurisdiction.

EPS adjustment: Both require recalculating historical EPS. If a 2:1 split occurs mid-year, all prior periods must be restated as if the split happened at the beginning.

Explore more corporate actions in our CFA Level I equity modules.