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
It doesnt. Your intuition is correct, there is no direct effect on a company when the price goes up or down. Bankruptcy does not occur when the price goes to 0, the price goes to 0 when the company goes bankrupt (which is when you owe more to banks/creditors than you can pay). The causal direction is the other way: when things happen in a company, the price changes
The reason companies care is because the owners [shareholders] are affected by a crash, and the company is beholden to its owners. In order to align interests, employees (especially leadership) are often paid at least in part with stock options, which have no value if the price crashes.
Furthermore, the price crashing (since it should be correlated with real problems) is used as an indicator for some business activities. A bank is going to be significantly more wary of giving you money, a share offering to new shareholders wont really work, etc.
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