How does a stock price going up help a company after the IPO?

November 10, 2017 12:31 PM

Companies hold IPOs to get bursts of cash as they go public. But what good does it do for the company when their stock price rises. It helps anyone with options and owners of the stock, but does it help the corporation, as an entity?

This is related, of course, to trickle down economics, but when I hear about rich people getting loads of cash and putting it into the stock market as creating jobs, I wonder how that is supposed to happen.

I understand that the owners of the stock are the owners of the company and that in that way the rise in share price helps them and thus helps the owners. But, once again, I don't see this helping the person of the corporation. Unless they issue new stock. But I've never heard of that happening.

If this is actually a complicated question, I would welcome places to start reading, given that my knowledge of economics comes from leaving sticky notes in my friend's textbook to make her laugh. (At one point in time, they introduce the Hat Algebra, which I contrasted with the lesser known Pants Algebra.)

posted by Hactar to Work & Money (13 answers total)

Hey! It's not that complicated. When a company does an IPO, My understanding is that they keep a large amount of stock for themselves as well. Many companies are their own largest stakeholder - and frequently use those stocks to "pay" executives over time.

Also, more complicated, but I think they can just "issue new stock" now and then. I think this is when they sell more of their "tucked away" stock.
posted by bbqturtle at 12:38 PM on November 10, 2017

Unless they issue new stock. But I've never heard of that happening.

Growing companies issue new stock pretty regularly. Tesla is one example that is pretty easy to Google.
posted by The_Vegetables at 12:49 PM on November 10, 2017

As a general rule, increases in stock price are assumed to reflect improvements in the company's performance, and so companies who can do better according to that metric are perceived as more successful, which can be leveraged in all kinds of ways. But it's important to understand that increases in stock price on the secondary market do not go directly to the corporation. They go to the people who happened to sell at higher prices than they bought for, who may be completely unrelated to the corporation.

If you're talking specifically about IPOs, as a matter of fact, a corporation actually has an interest in having the highest possible price for its IPO that will clear the market. As you've noted, that money does go into their pockets. The later "pop" in price is of interest to the underwriters and the people to whom they hope to sell the stock, not so much to the corporation. This actually creates a conflict between the company undergoing the IPO and the financiers who are underwriting it--the financiers want to get discount-priced stock into the hands of their favored customers, whereas the company wants to realize as much money as possible through the highest possible price. (Or, in some cases, when the underwriter actually buys the entire offering en masse before reselling, the underwriter wants the greatest possible difference between the price they buy at and the price they sell at.)
posted by praemunire at 12:51 PM on November 10, 2017

Issuing new stock dilutes the value of existing stock (or should).
posted by praemunire at 12:51 PM on November 10, 2017

The owners of the stock are the owners of the company. When the stock price goes up, it benefits the company by benefiting the owners of the company.
posted by skewed at 1:05 PM on November 10, 2017

As some say above, many companies compensate employees with stock as well as cash, so when the price is up they can hand fewer shares to employees and still make them happy (for instance, my employer specifically calls out that they give stock bonuses in dollar amounts, so if the stock is $50 one year and $30 the next and they want to give me a $150 stock bonus in successive years, they have to give me fewer shares when the price is high).

In addition, many acquisitions are paid for with a combination of shares and cash, so a high stock valuation means you have major purchasing power to buy other companies.
posted by potrzebie at 1:14 PM on November 10, 2017

To clarify: I was talking about stock price on the secondary markets. Beyond holding shares in reserve, does it help a big, older company, like say, PepsiCo if its stock price rises? Beyond attracting a perhaps richer type of stock owner?

I guess I'm wondering, beyond their own immediate compensation, why do the CEO/COO/CFO/C*O of Pepsi care about the stock price? Or is this purely driven by self-interest?

(I'll stop thread sitting, I just felt that I could clarify, also, asking follow up)
posted by Hactar at 1:36 PM on November 10, 2017

I should have previewed, thank you potrzebie.
posted by Hactar at 1:37 PM on November 10, 2017

You've heard of the phrase "keeping shareholders happy", right? Stock ownership grants the owners of that stock certain privileges as part-owners of that company, typically allowing them to vote on filling positions in the board of directors and on various positions they feel a company should take, etc., though the exact privileges depend greatly on the type of stock one owns. CEOs that don't keep shareholders happy are more likely to lose their jobs due to shareholder action, so there is also some direct pressure to keep the stock price trending up (in addition to the excellent reasons already mentioned by potrzebie).
posted by Aleyn at 2:03 PM on November 10, 2017

Along with "keep the shareholders happy and you'll keep your job", C-level executives typically also get bonuses based on "performance".

In a lot of cases "performance" is defined as "increase of the stock price compared to some baseline".
posted by JoeZydeco at 2:11 PM on November 10, 2017

As JoeZydeco says, "performance" for the purposes of determining executive compensation is usually tied to stock price in one way or another. So most executives take a keen interest. You might be interested in reading the classic book about Enron, The Smartest Guys in the Room, which gives a vivid feel for that dynamic. In that case, of course, the insane pursuit of increasing stock prices helped fuel a massive fraud that took down the company!

No one really gives a monkey's what Joe or Sally Smallholder thinks of management, but these days it has become quite fashionable for certain types of hedge funds and other large institutions to act as "activist" investors, accumulating a relatively large stake and agitating for change. Their goal is virtually always short-term: to raise the stock price so they can sell for a profit. An "underperforming" company in terms of stock price is likely to be targeted by such "activists." Management is generally not a fan of the experience.
posted by praemunire at 2:20 PM on November 10, 2017

(But, I mean, ultimately if your question is: do rising stock prices create jobs? The answer is: it's complicated, but not really, not very much, not directly, and certainly not necessarily.)
posted by praemunire at 2:21 PM on November 10, 2017

Previously on Ask: Why do companies care about their stock prices?
posted by Syllepsis at 10:36 PM on November 10, 2017