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Why the financial state of a company is affected by her stock market value?

November 7th, 2010 | | Tags: , | 2 Comments | |

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Why a company benefits from a high stock value?

They already sold the to the public, unless the company sells more shares in a higher price how the fact that the people trading in a higher price effect its financial state ?

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2 Responses to “Why the financial state of a company is affected by her stock market value?”

  1. eternal student Says:
     November 7th, 2010 at 5:03 pm

    Financial position of a company is not affected by its stock price. Rather, the financial position of a company is reflected in its stock price. Having said that, a rich stock valuation provides some advantages:

    The company can use its richly valued stock as a currency to make acquisitions.

    A high and well performing stock price helps attract and retain talented people to the company.

    It also means lower cost of capital for the company, should it decide to raise more equity capital. It can take advantage of the high share price to raise more capital (cheaply) in a seasoned offering. [Issuing additional equity signals that the management thinks that the stock is over valued. To avoid such signaling effect established firms rely on issuing debt rather than equity to raise more capital.]

  2. eric c Says:
     November 7th, 2010 at 5:03 pm

    A company does not benefit from stock price alone.

    You are correct there is no mathematical advantage to have higher priced shares, as the capital has already been raised when the stock was originally sold. A company can split or reverse split the outstanding shares however they want, and in turn increase or decrease the price per share. The only connection is that a company who’s stock price is high is likely that the stock has been appreciating and one that is low has likely be depreciating.

    High stock price can not automatically be associated with good short term performance though. Take GOOG for example stock price is $300 per share, sounds high, right? Not when compared to the highs seen last year of over $700 per share. So, there can be a big difference between high price and good performance.

    A company can only use its shares as currency for acquisitions relative to its market cap, not share price. A company with $500 per share price and market cap of $2 billion, will be less likely to use shares for acquisition than a company with share price of $40 per share and market cap of $150 billion.

    Share price has nothing to do with the cost of raising additional capital. Stock price has little or no bering on credit rating unless there is a chance of exchange delisting, which usually means the company is have financial difficulty already.

    The difference is mostly psychological. People associate high stock price with good stock performance.

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