Once a company has borrowed money from the public (what is popularly known as an IPO) why should it care whether the stock goes up or down. After all they have got the money they wanted; now why should they worry about fluctuations in their stock. There are a number of reasons:
1. The owners (promoters) and the company management in most cases will have a lot of shares themselves. So if the share goes up, they all become richer. Hats enough incentive to care about the stock.
2. Shareholders can fire the management - In the short run the management might have no control over the stock but if the stock is under performing for longer periods, the shareholder's returns will be affected and they can band together and fire the CEO.A similar event led to the resignation of YAHOO's CEO recently. So if the CEO's job is on the line then he has all the reasons to worry about his company's stock.
3. Financing - If a company's stock is doing well then it’s a sign that the company itself is doing well and has good future prospects. Stock is sometimes used as a barometer by lenders to decide on the credit worthiness of a company. A company with a consistently surging stock might for example get a loan at a lower interest rate.
4. Prevent Takeovers - If a company's stock falls substantially, then a number of other companies/competitors will try to buy a lot of stock from the open market and hence garner majority control and then may be demand a position on the board or in worst case demand the right to run the company. A recent example would be SATYAM. Ever since its stock has fallen to the ground, L&T is trying to buy up a lot of shares from the open market and is in talks with the government to assume management control.
So there is more to issuing stock then just borrowing money from the public. Once you have "done an IPO" you are supposed to be more responsible, very transparent and most importantly answerable to your shareholders.
1. The owners (promoters) and the company management in most cases will have a lot of shares themselves. So if the share goes up, they all become richer. Hats enough incentive to care about the stock.
2. Shareholders can fire the management - In the short run the management might have no control over the stock but if the stock is under performing for longer periods, the shareholder's returns will be affected and they can band together and fire the CEO.A similar event led to the resignation of YAHOO's CEO recently. So if the CEO's job is on the line then he has all the reasons to worry about his company's stock.
3. Financing - If a company's stock is doing well then it’s a sign that the company itself is doing well and has good future prospects. Stock is sometimes used as a barometer by lenders to decide on the credit worthiness of a company. A company with a consistently surging stock might for example get a loan at a lower interest rate.
4. Prevent Takeovers - If a company's stock falls substantially, then a number of other companies/competitors will try to buy a lot of stock from the open market and hence garner majority control and then may be demand a position on the board or in worst case demand the right to run the company. A recent example would be SATYAM. Ever since its stock has fallen to the ground, L&T is trying to buy up a lot of shares from the open market and is in talks with the government to assume management control.
So there is more to issuing stock then just borrowing money from the public. Once you have "done an IPO" you are supposed to be more responsible, very transparent and most importantly answerable to your shareholders.
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