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This has nothing to do with the crisis or current markets. This is a hypothetical question.
Let's say Company XYZ goes public to raise capital. It has a small IPO, offering ten million shares at $20/share, creating $200M in capital.
It never pays a dividend. It never executes a split, a merger, or any other corporate actions. It never buys back shares. It never conducts a seasoned offering. In other words, the number of shares never fluctuates and there's never any ex dividend or other actions to artificially affect the price per share.
The stock price rises and falls and rises and falls in the secondary market.
The question I have, and have always had, is this: why should Company XYZ care about its share price anymore? And conversely, why should shareholders or potential buyers care about the market news of Company XYZ? I understand that there IS a connection, I just can't figure out the nature of it; but I know it exists -- if Company XYZ gets sued to death, or its product is found to cause cancer, or it goes bankrupt, people leap out of the stock and it may even be delisted and eventually worthless. But why?
It seems to me that in the above scenario, with no more shares and no dividends, the company and its common stock are two completely separate entities. They seem to exist without any ties to each other. Why would people buy when the company's product is proven to cure cancer? Why would people sell when it causes cancer? Why should the company pay any attention to what its share price is doing? The shareholders aren't going to benefit from earnings in the form of dividends.
I can explain my dilemma further if needed. But based on this, what do you think?
This has nothing to do with the crisis or current markets. This is a hypothetical question.
Let's say Company XYZ goes public to raise capital. It has a small IPO, offering ten million shares at $20/share, creating $200M in capital.
It never pays a dividend. It never executes a split, a merger, or any other corporate actions. It never buys back shares. It never conducts a seasoned offering. In other words, the number of shares never fluctuates and there's never any ex dividend or other actions to artificially affect the price per share.
The stock price rises and falls and rises and falls in the secondary market.
The question I have, and have always had, is this: why should Company XYZ care about its share price anymore? And conversely, why should shareholders or potential buyers care about the market news of Company XYZ? I understand that there IS a connection, I just can't figure out the nature of it; but I know it exists -- if Company XYZ gets sued to death, or its product is found to cause cancer, or it goes bankrupt, people leap out of the stock and it may even be delisted and eventually worthless. But why?
It seems to me that in the above scenario, with no more shares and no dividends, the company and its common stock are two completely separate entities. They seem to exist without any ties to each other. Why would people buy when the company's product is proven to cure cancer? Why would people sell when it causes cancer? Why should the company pay any attention to what its share price is doing? The shareholders aren't going to benefit from earnings in the form of dividends.
I can explain my dilemma further if needed. But based on this, what do you think?
A share in a company's stock is an ownership stake of the company. Essentially, the stock market measures how "valuable" a company is in an open market.
Even if there is a fixed number of stocks... news on performance, failures, etc. affect the share price since it affects the perceived "value" of the company. A growing company with good foundations is worth more... or perceived to have more value in the future.
Board members and the company cares because most performance measures tie share price with compensation... and of course what f_m says about employees and their stock options and likewise equity ownership.
If the company goes bankrupt, the perceived value of the company diminishes to zero. If you own one share of your XYZ company... essentially you own 1/10M of the company. If the company goes bankrupt... then there isn't a company to own... hence why the share value goes down to zero.
Even if there is a fixed number of stocks... news on performance, failures, etc. affect the share price since it affects the perceived "value" of the company. A growing company with good foundations is worth more... or perceived to have more value in the future.
It seems like such a game. It's almost like you could do an IPO on a nonexistent company and get people trading it, and why not, since there will never be more shares, dividends, or corporate actions. In the real world, all the news of the underlying Company XYZ, including earnings reports, are just like the rolls of the dice, the things to throw fun little twists into the market for the stock so that people have something to get down or up about and sell or buy because of. Otherwise, without news, XYZ stock would probably not be very volatile. But in reality, all that news really doesn't affect the shares themselves.
Let's say XYZ's product is suddenly found to cause cancer. This prompts a huge selloff with almost everyone trying to dump it and almost no one buying it, killing the share price. I find this irrational. It's like you landed on a chute instead of a ladder or rolled a 3 instead of a 12. But there's no real reason the share price should go down.
Quote:
Originally Posted by chuck22b
Board members and the company cares because most performance measures tie share price with compensation.
I suppose this is true, but it again doesn't make a lot of sense to me. The two entities, the stock and the company, are only connected in name. Since IPO, there's really been no connection between the two and there never will be.
Quote:
Originally Posted by chuck22b
If the company goes bankrupt, the perceived value of the company diminishes to zero. If you own one share of your XYZ company... essentially you own 1/10M of the company. If the company goes bankrupt... then there isn't a company to own... hence why the share value goes down to zero.
Purely hypothetical: What if there was a stock that forgot the company? What if the name of the stock and the name of the company were changed so that you couldn't tie the stock to the company anymore? What if the company went under but people decided to keep trading the stock just for the hell of it? Couldn't the stock keep going up and down on its own, independent of the activities of the company? What if the registrar/transfer agent decided to key the stock's game of ups and downs to something new --instead of the company's earnings and media reports, what if it decided to key it to the performance of the Dallas Cowboys? Or the ratings for the show Pushing Daisies? Or whatever?
It seems like such a game. It's almost like you could do an IPO on a nonexistent company and get people trading it, and why not, since there will never be more shares, dividends, or corporate actions. In the real world, all the news of the underlying Company XYZ, including earnings reports, are just like the rolls of the dice, the things to throw fun little twists into the market for the stock so that people have something to get down or up about and sell or buy because of. Otherwise, without news, XYZ stock would probably not be very volatile. But in reality, all that news really doesn't affect the shares themselves.
Let's say XYZ's product is suddenly found to cause cancer. This prompts a huge selloff with almost everyone trying to dump it and almost no one buying it, killing the share price. I find this irrational. It's like you landed on a chute instead of a ladder or rolled a 3 instead of a 12. But there's no real reason the share price should go down.
I suppose this is true, but it again doesn't make a lot of sense to me. The two entities, the stock and the company, are only connected in name. Since IPO, there's really been no connection between the two and there never will be.
Purely hypothetical: What if there was a stock that forgot the company? What if the name of the stock and the name of the company were changed so that you couldn't tie the stock to the company anymore? What if the company went under but people decided to keep trading the stock just for the hell of it? Couldn't the stock keep going up and down on its own, independent of the activities of the company? What if the registrar/transfer agent decided to key the stock's game of ups and downs to something new --instead of the company's earnings and media reports, what if it decided to key it to the performance of the Dallas Cowboys? Or the ratings for the show Pushing Daisies? Or whatever?
The stock and the company is directly linked. One share is equal to an ownership stake off the company (with rights to vote, etc.). It's impossible to unlink the stock from the company because the stock is the market value of the company.
In a sense the stock market is a game. Almost any market is a game... everybody assigns a value to something based on news, earnings, supply, demand, etc. etc. etc. The referee and market keeper are the exchanges and the SEC. But, unlike a dice game, stocks/companies inherently have value based on their market position, management team, fundamentals, book value, etc. which in an efficient market are priced in.
In a game of chance I could role five dices and get totally random results. The stock market on the other hand, in the most part... we can be fairly certain with current analysis that GE will be here tomorrow.
In theory if the markets decide to use TV ratings to influence their trading they can do that. There are many individuals, institutions, media, etc. that have the ability to influence/shape the market to follow a different tune. Shareholders today are dumping shares left and right in spite of strong fundamentals, management team, business plans, earnings, etc. Essentially the markets are behaving irrationally. An irrational market is inefficient... and therefore it may present a buying opportunity.
Generally speaking though, if a company isn't selling or buying back shares... the stock value of the company is meaningless to the company. Just like if you aren't selling your house... the current market price is meaningless. Although... eventually fundamentals (P/E, book value, debt ratios, etc. etc.) come back in play when the markets become more rational. For a house it's the affordability (price/income), inventory, population, general economy, and location.
Other reasons a company would still care about its stock price: Cheaper financing, less risk of takeover, and better publicity.
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