From my little understanding, company’s issues stocks to raise money. So once the company’s sell those stocks, why does it stock prices matter to them?
In: Economics
A lot of the answers given so far are telling you that the big problem would be unhappy investors selling their stock. But not answering why management would care if investors sell their stock and the price goes down. Here’s a few;
* Self-Interested Management
* Company principals often have their compensation tied to stock performance (as a proxy for overall business performance), and so are incentivized to maximize it
* Shareholders expect management to increase the stock price or pay dividends to make their investment worthwhile, and may intervene in the Board if they are satisfied, including calling for things like replacing management, spinning off business units, or trying to sell the company, etc
* Fiduciary Duty
* Management has a legal obligation to act in the best interest of shareholders, which is almost universally understood in board rooms to mean increase shareholder value. Decisions that deliberately reduce shareholder value could open management up to civil liability, including class action lawsuits
* Reduces Costs of Doing Business
* When a company’s share price is higher, it means they are more valuable, which in turn means they can get access to bigger loans from banks or bondholders at lower interest rates. As an analogy, it’s like the difference between someone wanting to take out a HELOC on their paid off home vs. getting an unsecured loan from the bank. The unsecured loan will be smaller and have way higher interest rates. In essence, the company’s ownership stake becomes collateral for loans.
* Why is this good? Because a company that can take out loans more cheaply than their competitors is more likely to beat them. Imagine two companies in the exact same business, say Coca Cola and Pepsi. Coke can take out loans at 3%, but Pepsi costs them 5%. For any new venture that they embark on, Pepsi needs starts off at -2% in the hole to be profitable compared to Coke. That means they’ll have to charge higher prices, or pay less attractive salaries to workers, or source lower cost materials, etc, in order to remain competitive
* Corporate Defense
* A higher stock price means the overall valuation of the company is higher, which in turn means it is harder for a outside party try execute a hostile takeover or leveraged buy-out
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