Explanation

A stock dividend involves issuing additional shares to existing shareholders without any cash payment. When a company issues a stock dividend:

1. The total market capitalization remains unchanged - The company's total value doesn't change because no new capital is raised
2. The number of shares outstanding increases - More shares are issued to existing shareholders
3. The share price decreases proportionally - Since total value is spread over more shares

Example: If a company with 1 million shares outstanding at $100 per share (total market cap = $100 million) issues a 10% stock dividend:

• New shares outstanding = 1,100,000
• New share price = $100 million ÷ 1,100,000 = $90.91

The share price decreases to maintain the same total market capitalization. This is different from a cash dividend, which transfers value from the company to shareholders and may affect share price differently.

Key Concept: Stock dividends are essentially a stock split in disguise - they increase the number of shares outstanding without changing the company's fundamental value, leading to a proportional decrease in share price.