What are the effects of over capitalization?

1-On Shareholders- The over capitalized companies have following disadvantages to shareholders:

A-Since the profitability decreases, the rate of earning of shareholders also decreases.

B-The market price of shares goes down because of low profitability.

C-The profitability going down has an effect on the shareholders. Their earnings become uncertain.

D-With the decline in goodwill of the company, share prices decline. As a result shares cannot be marketed in capital market.

2-On Company-

A-Because of low profitability, reputation of company is lowered.

B-The company’s shares cannot be easily marketed.

D-With the decline of earnings of company, goodwill of the company declines and the result is fresh borrowings are difficult to be made because of loss of credibility.

E-In order to retain the company’s image, the company indulges in malpractices like manipulation of accounts to show high earnings.

F-The company cuts down it’s expenditure on maintainance, replacement of assets, adequate depreciation, etc.

3-On Public- An overcapitalized company has got many adverse effects on the public:

A-In order to cover up their earning capacity, the management indulges in tactics like increase in prices or decrease in quality.

B-Return on capital employed is low. This gives an impression to the public that their financial resources are not utilized properly.

C-Low earnings of the company affects the credibility of the company as the company is not able to pay it’s creditors on time.

D-It also has an effect on working conditions and payment of wages and salaries also lessen.