I get the idea that stock values are supposed to he indicative of the company. If the company is more profitable its stock is worth more cause you’re investing into a more valuable company. But when a company will go to extreme measures to increase stock value, how does that benefit them? Do share holders have that much sway the company needs to appease them and can that not be avoided by just selling of less of a company? Also once a company in running well, but advantage does selling stock give them other than the cost the stock was sold at?
In: Economics
You are discussing the fundamental question of capitalism and the purpose of organizations.
Start by assuming there is only 1 shareholder, then the reason for that is obvious – because that is a sole owner of the company. Now say that there are 2 owners – it still makes sense. Assume that the company is larger and there are now 10 shareholders but none of them want to be involved in the day to day operations so they hire a CEO. What do you think their instruction to the CEO is going to be?
At the end of the day, one “purist” idea is that shareholders hold ALL the authority to determine what a company does because they are the owners. A CEO is an employee like any other and the CEO is employed by the shareholders.
There are other issues in the “power struggle” between the owners and the other parties :- agency (between key employees and shareholders), stakeholder rights (employees, suppliers, local community), regulatory/government/political.
Theres a few reasons that stand out to me.
The most obvious is that it directly effects the employees that receive equity and stock options. Given that these people tend to be executives, the company as a whole tends to start caring about its stock price. In cases where founders still work for the company (ex. Facebook), the entire net worth of the wealthy guy running the place is dependent on the stock price of the company.
It makes it easier to finance expansion. To raise capital for expansion or taking on a new project a company can either issue new shares or issue debt. If shares of your company are trading at high prices then you can raise capital by issuing fewer shares. This dilutes the existing shares less, and raises the upper limit on the amount of capital a company could possibly raise. In other words they can operate as if they were a larger company in some ways.
It offers safety. A company which is trading at a premium relative to its physical value and actual profitability (ex. Take a look at the p/e of Netflix right now) becomes a less appetizing target for a leveraged buyout.
Private companies in which stock/equity is held by a small pool of owners are basically that.
Once a company is being publicly traded the people who control the majority of the shares (and therefore the company) normally want one thing: to make money. The company’s CEO/C-suite are below the board of the directors and the board normally have some stake in the company or are representing groups with a stake in the company.
The directors (CEO, CFO, Board, etc) have a fiduciary responsibility to the shareholders.
This means, if the people running the company don’t try to make the stock more valuable, they can get in big legal trouble and may even lose the right to run a company.
That pretty much never happens, but explains it at a base level. Basically, it’s their job to care
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