Importance of a “strong” share price

In Uncategorized on 18/10/2010 at 6:35 am

Why does mgt worry if the share price is weak?

— The founder of a public company here usually  owns a significant number listed shares. It’s also commonl for the management of a company to have  stock options tied to the company’s stock prices.

— The larger the market capitalisation of a company, the more analyst coverage the company will receive. Analyst coverage is a form of free (SGX fee-for-coverage scheme excepted) publicity and allows both senior managers and the company access to a wider audience.

— Poor stock performance could, over the medium to long term, be due to mismanagement. If the stock price consistently underperforms the shareholders’ expectations, the shareholders are going to look for management change. In extreme cases, shareholders can try to oust current management in a proxy fight.

— Creditors tend to look favorably upon companies whose shares are performing strongly: the company must be doing sumething right to attract investors will to chase prices. This treatment is in part due to the tie between a company’s earnings and its share price. Strong earnings are a good indication that the company will be able to meet debt requirements. The company will receive cheaper financing through a lower interest rate, which in turn increases the amount of value returned from a capital project.

— Strong price performance is useful for a company seeking additional equity financing. If there is demand, a company can always sell more shares to existing shareholders or new  investors to raise money. The higher the share price, the less shares it needs to sell.

— Listcos without a controlling shareholder are vulnerable to takeover  if they allow their share price to decline substantially. For this reason, companies would want their stock price to remain relatively strong to deter interested corporations from trying to take them over.

— A company whose shares are in demand,  has an advantage when looking to buy other companies. Instead of using cash to buy company will issue more shares to fund the takeover.

— Finally, managers  may aim to increase share simply to boost their egos, and marketability in the job market.


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