Over-capitalization has evil consequences from the point of view of the company, the society and the shareholders.
From the point of view of the company:
- Over-capitalization will result in considerable reduction of the rate of dividend on the equity shares issued. This is because the profits which the company earns have to be distributed over an unnecessarily large number of shares.
- With the disappearance of reduction of dividends, the market value of the shares falls, and the investors lose confidence in the company. The credit of the company suffers a setback. Should a company require more funds for the purposes of bringing about any improvement or acquiring new assets, it will find it extremely difficult to raise the necessary fund from the market.