capital stock issued in exchange for assets with a fair market value less than its par or stated value. In this manner,assets are recorded at overstated values. This practice is illegal if the board of directors acted in bad faith or fraudulently with respect to knowledge of such circumstances surrounding the issue. Watered stock got its name from the cattlemen's practice of encouraging their stock to drink large quantities of water, induced by salt, before taking them to market. Thus the stock would appear larger and perhaps become more valuable.