80 NATURE OF CAPITAL AND INCOME [Car V
other methods of stock-watering are possible. A common
one is to allow the plant to run down; 7.e. to fail to make
proper repairs, while retaining its old book value in the
balance sheet. A railway may be “skinned” in this way,
by diverting to dividends what should be paid to a depre-
ciation account. This operation, however, is not com-
monly called stock-watering, but mismanagement.
It is sometimes said that stock-watering is not wrong,
as long as all the terms and conditions are known. This
is much like saying that lying is not wrong, provided every-
body knows that it is lying; for a false balance sheet
is only one form of a false statement, and, ordinarily, a
false statement is made with intent to deceive. The object
may be, for instance, to mislead intending bondholders by
making them believe that there is a larger security for their
loans than actually exists. We see here one reason why
honest men often undervalue their assets. They prefer,
if there is any error in their valuations, that the error
shall be against themselves rather than in their favor;
in other words, that their representations as to finan-
cial strength shall be well within the truth. Yet it
not infrequently happens that undervaluations of assets
may, like overvaluations, serve the purposes of dishonesty,
— to “bear” the speculative market, for instance.
Many attempts have been made to prevent the frauds
which result from stock-watering. For instance, the State
or National governments compel publicity of accounts in
the case of insurance companies, national banks, and inter-
state railways. The stock exchanges require similar pub-
licity in regard to “listed” securities. Any company whose
securities are listed on the New York Stock Exchange
must publish its assets and liabilities at stated intervals.
But this rule is too general to be very effective. In some
cases the law requires the entire nominal capital to be paid
into the company, in cash or securities at their market
value, as in the case of national banks.!
1 Revised Statutes, § 5140 (Act June 3, 1864, § 13).
