Credibility, Accuracy, & Practical Value
Building the Business Case
Solution Matrix Ltd®

Par Value for Stock Shares and Bonds
Definitions and Meanings Explained

 

On the day of an initial public offering, the first hours of trading can be marked by substantial share price fluctuaion above and below par value (initial offering price).

Actual market price for stock shares can differ greatly from the stock's par value.

What is the Meaning of Par Value?

The term par value is applied both to (1) shares of stock companies issue and sell, and (2) to bonds that companies, governments, and other entities issue.

Par value has different meanings in each case, however.

Par Value for Stock Shares

When a company issues new stock shares, par value is the nominal, or officially stated value of a stock share when it is issued. However, the actual price investors pay at issue can and often does rise above par. The funds above par value that issuing companies receive for shares are called additional paid in capital, or contributed capital.

The term par came into use as a way for companies to assure the market that no shares would be sold below par (no one would receive favorable treatment).

Par value has little real relevance for accounting, because a stock’s market value (and the amount for which the company can actually sell it) can be quite different from par value. Nevertheless, companies keep separate Balance sheet listings for funds received as the par component of issued stock sales, and funds received as "contributed funds in excess of par." These two sums appear in separate lines on the Balance sheet under Owner's Equity. (See Exhibit 2, below, for example).

Par Value for Bonds

Par value for a bond, or face value, is the amount that the issuing company or government entity promises to repay the bond holder at a certain date (maturity date). A so-called  "$100 Bond" has a par value of $100, meaning the bondholder will receive $100 at maturity in addition to any interest earnings.

Explaining Par Value in Context

Sections below show how firms set par value for new stock shares, and how par value contributes to Owners Equity on the Balance sheet. The term par value appears in context with other accounting and finance terms, including the following:

Paid In Capital
Contributed Capital
Stated Capital
Par Value
Initial Public Offering IPO
Balance Sheet
Owners Equity
Preferred Shares
Common Shares


 

Contents

Related Topics

  • For a complete introduction to Owners Equity on the Balance Sheet, see Owners Equity.
  • See the article Paid In Capital for more explanation of of the par value role in contributing to stated capital and owners equity.
  • See Balance Sheet, for a complete introduction to Balance sheet structure, contents, and role in financial reporting.
 

Setting Par Value for Stock Shares
How Do Firms Choose Appropriate Par Value?

Facebook, for instance made its initial public offering on the NASDAQ exchange on 18 May 2012. For several days before the IPO, analysts and the financial media engaged in intense speculation, trying to forecast what the initial price would be. Analyst estimates for initial price ran from $26 to $45. Speculation outside the company was matched by intense discussion inside the company on choosing the optimal initial price. The actual price chosen was based on a consideration of

  1. The company's initial capitalization target.
  2. The number of public shares to be offered and the resulting ownership position of the initial owners.
  3. Predictions of share price changes, once the shares were on the market.

In brief, companies chose an initial share price they believe will meet objectives in all three areas. The goal is to achieve vigorous first day trading that does not disappoint the original owners, market analysts, or the new investors hoping to "get in on the ground floor" with shares that will continue to increase in value.

What Does Par Value Mean After Shares Are on the Market?

When a company makes its initial public offering (IPO) of stock shares, investors and analysts watch closely the relationship between initial offering price (par value) and the actual market price dynamics over the first few days of trading. A sharp rise in market price above initial offering price signals strong investor confidence in the company's future. A sharp decrease in market price signals the opposite.

In the final hours before trading in Facebook shares began, Facebook announced an initial share price of $38.00. In the first hours of trading, share price rose as high as $45.00. By market close the first day, however, the price fell to $38.23, just above the initial price. One week after the IPO, share price on the open market had fallen to $26.81. The result was that the IPO met and exceeded Facebook's initial capitalization goals ($16 billion), but left major investors uneasy and uncertain about prospects for share price growth.

The par value concept came into use as a vehicle for companies to announce, before an initial public offering, that no shares will be sold below a certain price (par value). The intent was to assure potential investors that that no one—including those inside the company—could buy at a more favorable price.

For publicly traded shares, the difference between share par value and market price can be come large, especially as the company succeeds or fails, and as the business cycle moves phases.

Balance Sheet Equity Accounting for Par Value

Business firms issue and sell stock shares to raise funds, of course. Funds they raise in this way are immediately funds that the firm owns outright. Proceeds of new share sales, in other words, become part of Balance sheet Owners Equity.

To understand how stock share par value and actual selling price contribute to Equity, consider first the Owners Equity section near the bottom of the very simple Balance sheet in Exhibit 1:

Grande Corporation                                   Figures in $1,000's
Balance Sheet at 31 December 20YY   
ASSETS  
22,075
LIABILITIES
OWNERS EQUITY
    Contributed Capital
    Retained Earnings
          Total Owners Equity
          Total Liabilities & Equities




9,439
 3,698
8,938



13,137
22,075
 

Exhibit 1. Balance Sheet Owners Equity comes from only two sources: Contributed capital and Retained Earnings.

Where Does Owners Equity Come From?

Profit-making companies in private industry usually define the highest level business objective as follows: Increase Owner Value.

In practice, business firms pursue this objective by earning profits. After a profitable period, firms can increase owner value by paying dividends directly to share holder owners. And, they can increase owner value by keeping some or all of the period's profits as retained earnings. Note that Balance sheets such as Exhibits 1 and 2 report the total retained earnings from across the firm's history.

Retained earnings, in turn, are one of two ways the firm can build equity--the the value of resources the firm owns outright. The other approach for increasing Equity is to take in Contributed capital (Paid-in Capital). Thus:

  1. Retained earnings build equity with funds earned in normal operations
  2. Contributed capital builds equity with funds investors contribute directly to purchase new shares. Contributed capital therefore does not come from normal business earnings.

For more on the role of retained earnings in building equity, see the articles (1) Statement of Retained Earnings and (2) Owners Equity.

The Role of Par Value in Contributed Capital

After public share sales begin, the par value concept serves only to recognize the price initially set by the company. To show the role of par value in equity reporting, consider a simple stock-issue example and also the Balance sheet in Exhibit 2.

Example: The directors and officers of Grande Coporation decide to issue 10,000 new shares of common stock, at a par value of $1 per share. Suppose also that in the firm's public offering of the same shares, investers bid the actual share price up above par, so that by the end of the offering day, the 1,000 new shares have sold at an average price of $3. As a result, Grande has raised $3,000 of contributed capital from the new share sales.

Note that the $3,000 new contributed capital will impact two Contributed Capital lines on the Balance sheet, not one. Firstly, Grande will add $1,000 to the value of the Common Stock line, recognizing par value received for 1,000 shares. Secondly, Grande will add $2,000 to the value of the Equity line Contributed Capital in Excess of Par.

In brief, the Contributed capital "line" of Exhibit 1 becomes a Contributed Capital Secion in a more detailed Balance Sheet, normally including three line items, as follows:

  1. Preferred stock: Preferred share par value received for shares when originally issued.
  2. Common stock: Common share par value received for shares when originally issued.
  3. Contributed capital in excess of par: Funds received for shares sold by the issuing company directly to investors, who bought shares at a price higher than par.

Exhibit 2, below, shows a more detailed version of the Exhibit 1 Balance sheet, with typical contributed capital items.

Grande Corporation                                   Figures in $1,000's
Balance Sheet at 31 December 20YY   
ASSETS
Current Assets
   Cash
   Short term investments
   Accounts receivable
   Notes receivable short term
   Inventories
   Prepaid exp, insurance, def taxes
          Total Current Assets
Long Term Investments and Funds
Property, Plant & Equipment
Intangible Assets
Other Assets
                    Total Assets


    


1,369
  137
1,832
     20
5,986
  265











9,609
1,460
9,716

1,222
      68
22,075
LIABILITIES
Current Liabilities
Long Term Liabilities
                    Total Liabilities

 
3,464
 5,474
8,938
OWNERS EQUITY
Contributed Capital
   Preferred stock
   Common stock
   Contributed capital excess of par
          Total Contributed Capital

Retained Earnings
          Total Owners Equity


3,798
4,184
 1,457





9,439

 3,698








13,137
          Total Liabilities and Equities
    22,075
 

Exhibit 2. On the Balance sheet, stock shares sold by the issuing company include contributed capital, which reflects par value as well as funds paid in excess of par.

The premier Business Case Seminars

Business Case Master Class

Join the premier seminar on business case analysis. Earn professional education credit while building your case. Download case-building books and software when you register!

Join us in London, New York, or Washington DC.