1
$\begingroup$

As the title hints, why would the stock price matter for a firm?

Which are -in rough terms- the channels that a firm's stock price influence it?

$\endgroup$
3
$\begingroup$

There are multiple channels :

  • Debt: the cost of debt may raise significantly if the value of equity drops. Indeed, the lower the equity, the higher the risk of the debt, as the firm will have a higher gearing ratio (also called leverage). Thus, the firm might have difficulties to gain access to additional debt or face a higher cost.

  • Financing: A firm with a poor performance on stock markets might face difficulties to raise additional capital. Investors might indeed not be willing to buy the firm's stock if its performance is poor. Therefore the firm might not be able to raise additional capital.

  • Reputation: a decrease in stock price can negatively affect the reputation of a firm. Not necessarily with the customers but also with other stakeholders, such as the suppliers which could fear that the financial stability of the firm is not assured.

So overall I would say that the stock price is mainly important to the firm as it is a strong determinant of the costs it will face when raising capital or debt.

Also, note that stockholders are owners of the firm. As such, they can compel the firm to adopt a more profitable strategy, if they so wish. Of course, it might be hard, but activist investors for example show that it is possible.

$\endgroup$
1
$\begingroup$

The purpose of a firm is to generate income for it's share holder. Two sources of profit are appreciation and dividends. Besides that the price fluctuations can mean that the firm is doing something right/wrong and stock holders are reacting accordingly... So the price reflects on the expectations of the future profitability of a firm.

$\endgroup$
-1
$\begingroup$

It does not matter to the internal operations of the company.

The exceptions would be financial channels. For example, if the the company is actively buying, selling stock, or planning on buying/selling stock it is a big deal.

It is a very big deal for mergers and acquisitions of course...even if the buyers as stocks are frequently used to buy other companies.

It is also a very political statement. If a company is wanting to borrow or refinance debt, a strong stock price can influence their credit rating favorably. But rally the biggest reason is board politics. A stock price tends to correctly with shareholders feelings for a company. If low enough, there is a possibility that the board of directors and/or executives will be fired.

$\endgroup$
  • $\begingroup$ Many companies use options & shares as part of the remuneration of their employees: for them, the stock price matters a great deal to the internal operations of the company. $\endgroup$ – EnergyNumbers Jan 13 '16 at 13:07

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.