Overcapitalization

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DEFINITION

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.



INVESTOPEDIA EXPLAINS

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.




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