Investor relations people and execs. seem to spend a lot of time worrying about this. But why? I can see them wanting to boost the IPO price, because that means a bigger cash influx.
Now, I know many companies engage in share buybacks, or keep an authorized-but-not issued block of stock in reserve, which I guess they could then sell in a secondary issue for further profit. Or, Warren Buffett and other execs. often personally invest heavily in their own companies so helping the shareholders boosts their own net worth.
But is every company in that situation? And if not, once they’ve got the one-time cash-in from the IPO – why do they really care what happens with share price or whether investors are happy?
In a large corporation, many of the directors and executives may be significant shareholders, and thus they care about the value of their portfolios.
In addition, if the company wants to make secondary offerings for more cash, the market won’t pay much more than the current share price for new shares.
In addition to that, the company may have loans or lines of credit secured by shares owned by the corporation. If the price goes down, the banks may call in the loans.
Add to that: if the stock price falls too low, the company may become a takeover target.
Further, investors, in theory, run the company. If they’re not happy with the stock performance, they can theoretically work to replace the board with someone who does care about performance. (I say theoretically because it’s very hard to manage it.)
The shareholders of the corporation ultimately elect the CEO and members of the board. If those individuals are not acting in the best interest of the shareholders, they will be removed by the shareholders.
As well as actual benefit to the corporation as an entity, there are lots of other factors. Many managers and officers have bonuses in stock options, and direct payment based on rises in total stock value. For them, it matters what the price is, no matter what that means to the company. It also causes managers who intend to leave the company, either honorably, or dishonorably (See: Enron) to try to boost the price of stocks before they cash in their options or gain their bonuses.
Would YOU invest in a company where the management doesn’t give a crap if your investment ever gets more valuable? Not only are top execs charged with this as their duty, they are almost always incented with stock, stock options and bonuses that will increase in value as the stock goes up.
I understand all that… but what I don’t get is why so many CEOs and boards are concerned with short-term prices.
I mean, if a business is having robust positive cash flow, selling a lot of products, and generally kicking ass and taking names, and something odd happens somewhere else in the world, and your stock price drops, why worry about it, unless it’s directly affected by whatever happens? It’ll all eventually sort out, and if you’re good at what you do, then your company will be in a strong position when it’s sorted out.
Doing stupid-ass short term things to temporarily boost the stock price is kind of idiotic if you ask me. It’s like worrying about the value of your 401k on a monthly basis.
Most CEOs aren’t that concerned with day-to-day fluctuations, unless there’s a huge change. It’s the stupid and/or criminal ones who obsess over that, and often end up making the news.