Why the Par Value of Share Matters to Investors

Tadeusz Dudycz,Bogumiła Brycz

doi:10.3390/ijfs9010016

Abstract

The purpose of the study is the analysis of the relationship between the par value (also known as nominal value or face value) and the parameters influencing a company’s financing. Additionally, the utility of the par value as a manipulation tool for equity offerings is examined. The study is based on a sample of IPO firms which went public on the Warsaw Stock Exchange. The study finds that an excess supply of shares has a negative impact on their valuation. In contrast, decreasing the par value prompts perceptual biases among investors beneficial to the success of the issuance. Moreover, share capital is found to be a useful signaling tool to improve the company’s position on the financial market.

Highlights

The concept of par value was created to protect the public against fraud in the sale of stocks (Cook 1921)
The par value regime was supported by the Second Council Directive of 13 December 1976 and later analyses presented in both the Reforming capital report prepared by the Interdisciplinary Group on Capital Maintenance (Rickford 2004) and the Feasibility study on an alternative to the capital company’s regime undertaken by KPMG on behalf of the European Commission (KPMG 2008)
The par value regime as the main part of the principle of maintaining capital is normally considered to be a technical issue for lawyers and accountants, it can significantly affect the financing of a company (Rickford 2004) because it represents a conjunction between shareholders’ and creditors’ interests (Santella and Turrini 2008)

Summary

Introduction

The concept of par value (hereinafter PaV) was created to protect the public against fraud in the sale of stocks (Cook 1921). The par value regime was supported by the Second Council Directive of 13 December 1976 and later analyses presented in both the Reforming capital report prepared by the Interdisciplinary Group on Capital Maintenance (Rickford 2004) and the Feasibility study on an alternative to the capital company’s regime undertaken by KPMG on behalf of the European Commission (KPMG 2008). The par value regime will not disappear from the economic law of many countries in the near future, which will require further research into its functioning and usefulness. The par value regime as the main part of the principle of maintaining capital is normally considered to be a technical issue for lawyers and accountants, it can significantly affect the financing of a company (Rickford 2004) because it represents a conjunction between shareholders’ and creditors’ interests (Santella and Turrini 2008).

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Conclusion