ough
the process of liquidation. Since, however, the shareholder in these
times is not quite so short-sighted as he used to be, there is not
perhaps really very much advantage in this point.

But since, as has been shown, capitalisation of reserves has no effect
upon the earning power and assets of the company, it is interesting to
try and discover why the rumour and announcement of such an intention
on the part of the board of directors is nearly always accompanied by
a rise in the shares of the company affected. If the shareholder is
merely to be given a larger nominal claim, which does not in the least
affect the value of the assets which that claim concerns, and if the
relative amount of his claim is exactly the same with regard to the
other shareholders, it is clear that the rise in the value of the
shares is based entirely either on a psychological mistake on the part
of the public and its financial advisers, or on the fact that the
transaction called attention to the value of the shares which have
hitherto been undervalued in the market. Probably the movement arises
from both these causes. A large number of people think they are better
off if they have a larger nominal share, without considering that
all the other shareholders are at the same time having their claim
increased, that the assets to which they all have a claim are not
being increased, and that, consequently, if a sharing-out process were
to take place they would all be exactly as they would have been if
no such capitalisation of reserves had been carried out. And if a
sufficient number of people think that a share or any other commodity
is more valuable, it thereby becomes more valuable, because value is
nothing else than the amount, whether in money or other commodities,
at which a commodity can be disposed of.

But it is also true that there are, at all times, a very large number
of securities, especially in the industrial market, which would
stand higher if their earning power and position were more closely
scrutinised. This is very clearly seen to be the case from the
apparently extravagant prices at which insurance companies, for
example, sometimes buy the businesses of one another. They give a
price which is considerably above the market value of the concern as
represented by the price of its shares. Critics say that the terms are
extravagant, and yet the deal is found to be highly profitable to the
buying company. The profit of the deal, of