DEFINITION of 'Overcapitalization'

When a company has issued more debt and equity than its assets are worth. An overcapitalized company might be paying more than it needs to in interest and dividends. Reducing debt, buying back shares and restructuring the company are possible solutions to this problem.

In the insurance market, overcapitalization occurs when supply exceeds demand, creating a soft market and causing insurance premiums to decline until the market stabilizes.

BREAKING DOWN 'Overcapitalization'

The opposite of overcapitalization is undercapitalization, which occurs when a company has neither the cash flow nor the access to credit that it needs to finance its operations. Undercapitalization most commonly occurs in companies with high start-up costs, too much debt and/or insufficient cash flow and can ultimately lead to bankruptcy.

  1. Undercapitalization

    When a company does not have sufficient capital to conduct normal ...
  2. Watered Stock

    Stock that is issued with a value much greater than the value ...
  3. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  4. Buyback

    The repurchase of outstanding shares (repurchase) by a company ...
  5. Overcollateralization - OC

    The process of posting more collateral than is needed to obtain ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
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