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
In addition to the answers regarding acting in the interest of shareholders (which is a fiduciary obligation), companies often own some of their own stock. This means they can sell it or borrow against it to raise additional money as needed.
The board of directors and officers of the company have a fiduciary duty to act in the best interest of the shareholders. This means they are legally required to do things that will increase the value of the company (aka the stock price).
First, they don’t only sell stock once. Companies are authorized to issue a certain amount, and it’s normal to issue stock in stages and hold some in reserve. Therefore, a higher stock price means the company is able to get more money by issuing shares or using shares as collateral for loans. Basically it means the company is worth more which is a good thing.
Second, stock conveys ownership in the company and so the company leadership has a legal duty to act in the interest of the shareholders. Maximizing price is one way but there are also things like dividends that we don’t really need to get into.
Ultimately, each traded share conveys voting rights so shareholders can kick out company leadership if the stock price makes them unhappy. This means that if the stock price becomes too low, the company is vulnerable to someone or another company buying enough shares to demand changes or actually become the majority shareholder. This is basically what a hostile takeover is but voting rights normally only matter during annual shareholder meetings which tend to be more boring.
Lastly, the people that work for a company often own stock, so when it’s worth more the people that work there can cash out.
many reasons including the fact that the stock owners are their boss via boards.
However the most direct reason is that people in leadership positions are often paid in stocks and stock options.
Other people hit on some good points. Some of it is illogical. Remember, everyone is human and can get emotional. In the short term, stock price does not matter very much.
Many rich employees and execs also depend their “salary” on stock. A HR manager at my old startup networth is 3.7 mil because she gets stock, but her salary is $0. She’ll sell the stocks at the cost of 20% tax, avoiding the 24%+ tax bracket. It’s how most execs get rich while avoiding high tax too.
The company is primarily beholden to its owners, aka its shareholders.
The shareholders primary interest in the company, and thus their ultimate metric of success, is the value of their shares.
Therefore, to the people that matter, success = high stock price.
Keep in mind that higher level managers and executives and other major shot callers generally get a lot of their compensation in the form of stock (options). So it’s not just random investors thay might occasionally get involved in a vote who are motivated by stock price, its the people making decisions year round.
Essentially if you multiply the number of stocks by the stock price you get the value of the company. If the company value is going down then that’s obviously not a good thing.
The total number of shares and the price of the stock is supposed to be the total value of the company. When you see a pattern of the value of the company increasing, it’s assumed the company is doing well/growing.
The company’s board of directors are also generally “voting members” and primarily base their decisions on the stock price, which leads to a widespread phenomena of “appeasing the stockholders” where most of the decisions of employees (generally middle management and up) are done to make the stock price increase, making the stockholders happy and less likely to make disruptive changes
Because it affects your ability to borrow money at favorable rates. Borrowing 1b is much easier when your market cap is high 100b and share price is high.
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