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
Companies can lose value (not actual money) on stock price declines. A lot of public companies have a pool of their own stock for investment and incentive purposes. They can offer stock or options to employees, and sell when the price is up to get more cash for operations. If their stock value declines, the overall value of that pool goes down which effectively means they also decline in overall value.
Many companies borrow money from banks based on their stock price as collateral. Price goes down and the bank wants more collateral. Also means they can borrow more money using their stock. Plus can’t sell it for much to investors to make money
so when a stock crashes it messes with investor trust and can make it hard to raise cash in the future. it’s like showing up to a party wearing socks and sandals. nobody wants to invest if they think you’re a mess. also with lower stock price it can lead to issues with loans or investors getting nervous. companies need that confidence to stay afloat
dude it’s wild how a stock price dive can freak investors out and mess up a company’s plans. like future funding becomes hard to get if stocks tank. companies ain’t losing cash directly but perceptions change fast in the market. it’s a whole drama that impacts everything from hiring to growth. crazy how things work in finance right
Public companies will typically give bonuses in stock instead of cash and you can’t sell it for some period if time, typically a year. If you got $50k in stock that declined 50% you’d be pissed. It there for increases demand for cash bonuses and makes stock grants less attractive. Companies also buy other companies via stock deals-they give the other firm $x worth of their stock instead of spending cash. Declining stock prices affects this as well
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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