Stock dividend processing is the work that depositories, custodians and brokers carry out when a company pays a stock dividend, distributing additional shares to its holders in place of cash. Where holders have no choice, the event is a mandatory corporate action. Intermediaries capture the announced rate, for example five new shares for every hundred held, and apply it to positions at the record date. On the payment date the depository credits the new shares and each firm passes them on to client accounts.
Odd holdings create a fractional entitlement, which is rounded or paid out as cash in lieu. Because the holder's total cost is now spread over more shares, cost per share is reduced through a tax lot adjustment, unless local tax law treats the shares as income. Positions on loan or pending settlement need claims to be raised. Outside the United States, similar events are handled as bonus issue processing.