Overcapitalization

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Overcapitalization

Said to occur when a firm cannot service its debt even though its debt/equity ratio is not excessive.

Overcapitalization

A situation in which a company has too much capital. An overcapitalized company has an excessive amount of cash or liquid assets; it may find itself in a position, for example, of paying high dividends that it would have difficulty reducing in the future. Its earnings may or may not adequately reflect the capital invested in the company. An overcapitalized company may repay its debt or make a tender offer for shares in order to reduce its capital.
References in periodicals archive ?
One purpose of the regulatory disallowances was to make utility management accountable for cost overruns and thereby reduce their incentive to overcapitalize.
We find theoretical support for the proposition that regulatory cost disallowances increase utilities' incentives to overcapitalize.
This is true even when recognizing that firms must overcapitalize to some degree to compensate for the electricity demand forecasting error.
Thus, even though the public utility may have an incentive to overcapitalize because of fair rate of return regulation [Averch-Johnson, 1962] or the concern for reliability, the quantity demanded may still exceed its capacity.
Given a stochastic demand and the Averch-Johnson effect, the firm may treat capital as a free-good and substantially overcapitalize, with reliability providing the justification for such high levels of capital.