Why does a company care about its stock price?

Paraphrased from: Why Do Companies Care About Their Stock Prices?

This is something I always wondered – in the sense that, once a company raises some money for itself through issuing some stock (security), then the company doesn’t directly benefit from increases to the price of that security – so why do they care? The premise of the question is that a company raises money through a stock offering but only through the initial sale of the issued shares. Once the initial buyer resells those stocks on “the secondary market” (which is what we think of as the stock market), the issuer (company) doesn’t participate in any gains/losses for that transaction.

The answer is multiple reasons:

  • Management of the company are often shareholders so they have a vested interest in the stock doing well.
  • When a stock performs below expectations for long enough, shareholders might get irate and take action.
  • The stock price is used as a proxy for assessing the financial health of the company. This is because stock price is typically tied to earnings per share (EPS), which itself identifies the money the company could have to pay off debt.
    • Therefore, a company with a high stock price is likely to have high EPS which means it is low risk for a loan and hence can get cheaper financing.
  • Any publicly traded company whose market value significantly lags its intrinsic value is a target for takeover.
  • If a company’s stock is viewed very favorably this may enable the company to acquire another company via issuing some more stock (rather than paying cash).
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