Can A Company’s Share Price Actually Affect Its Daily Operations?

When a privately-held company becomes publicly-listed, it might issue new shares to be sold on the share market. However, after that one-time influx of cash due to the sale of new shares, any existing shares that change hands in the public share market would generally not affect the company’s underlying business fundamentals.

That said, there are still instances where a company’s share price volatility might impact its business operations. Here’s a few:

1. The value of share options for management

It’s not uncommon for a company to grant share options to its top management as part of their pay package  – DBS Group Holdings (SGX: D05) and CapitaLand (SGX: C31) are just two examples of multi-billion dollar companies that award share options to top management.

I’m not saying this is what’s going on at DBS or CapitaLand but the general situation goes like this: Since the value of share options is based on the underlying share price of a company, management might be influenced to run the business in a way that might push up the share price in the short-run but end up hurting the company’s competitive position in the long-run. In other words, the focus would no longer be on creating long-term value for shareholders, but rather, to engineer short-term share price gains.

2. The morale of the company’s employees and shareholders

Employees of publicly-listed companies tend to hold shares of their employer. Therefore, the fluctuation in share prices for such companies has a direct impact on their employees’ personal wealth. It’s thus easy to see how a drop in share prices might lower staff morale.

Similarly, the morale of shareholders in a publicly-listed company is also very much affected by prevailing share prices. If a company is facing a prolonged decline in its share price – the shipping firm Neptune Orient Lines (SGX: N03) is one such example of a company whose share price has experienced a protracted fall – it might be under constant pressure from shareholders to ‘just do something’ to help prop up the share price. Such a situation might create a vicious cycle whereby management has to constantly change their company’s business strategy in an effort to please shareholders.

3. The ability to raise funds from issuing equity

In the last instance,  a company’s fundamentals can also be directly affected by its share price during times when it needs to raise funds. This is especially important for a company that’s just about to go public as the higher the price it can sell its shares for, the more cash it can receive.

As a rule of thumb, companies would prefer a higher share price whenever it needs to issue shares to raise funds as that would give the company more bang-for-the-buck.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not owned any companies mentioned above.