It sounds like a obvious question but hear me out. Yes, I understand why stock price and how a company performs have a direct correlation. I do also understand that a company’s performance affects its stock price. However, I do not understand the other way around, especially when the shares crashes.
This is my understanding how stock works: when a company goes public, the company raises money from the public in exchange to the ownership of the company. Stock price going up doesn’t mean the company gains more money as the investment is already made. Stock price going down doesn’t mean it looses money as they do not have to pay back for the investment. So why do companies go bankrupt due to its stock price crashing (and possibly get delisted)?
In: Economics
the most immediate impact is if the company gets margin called on loans made against its own value. it’s like if you took out a second mortgage and the housing slump crashes the value of said house after you already took the loan.
there’s also pressure from shareholders negatively affecting company decision making. imagine you are a CEO who has a long term plan, but your owners are making you do things for short term protection of their asset with potentially damaging long term impact. you might be forced to sell a money losing department with great potential in order to preserve more profitable but lower potential ones. or you might be forced to do layoffs earlier than you planned. sometimes the owners are correct, sometimes management is. it’s only easy to tell in hindsight. but the fact is that shareholders only care about the stock price and that should tell you something.
next is ability to attract talent via a stock compensation program like RSU. basically it is a way to pay bonuses in multi year instalments which is great for the company. if your price crashes, all those employees if you have been doing this with over the past years are harmed in the process and will lose confidence in the perception of that program’s value subsequently.
next has to do with reputation with customers and banks which can impact sales and ability to obtain favorable loans. this can have a downward spiral effect. this is not so immediate as the above
next is ability to raise capital via stock sale. its the opposite case of GameStop where management was able to make tons of cash selling their own stock while the market was pumping it for no reason. on the other hand if your price is crashing, you don’t have this great opportunity. this one is more like opportunity loss rather than an actual one.
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