Company shareprice - why does a company care?

[nextbigthing]

Hi,

Why does a company care about its shareprice?

Using an example, say a company worth $100m goes out and lists on the NZX exchange creating 100m shares worth $1 each. The original owners of the company now have no remaining holding and the shares are all owned by individual private investors.

The company keeps on trading succesfully but something happens and the shareprice tanks to 50 cents. This is where my question lies, why would the company care? How does it effect the company? They can just continue on as per normal, they've got their $100m and don't care if the investors now have technically have half what they started with. Am I right in saying apart from the reasons listed below, they actually have no obligation to maintain shareprice and it's only morals of a decent person or the reasons below that would will them to do so....

Reasons I can think of to maintain shareprice in this case (non exhaustive)

Directors have personal interest - ie own shares
Company retains an owning of itself eg owns 10% of itself
Future capital raising would be hard with a bad reputation (company or managers)
This 'reputation' may then start to affect core business

Ie What I'm getting at is, what's to stop a company saying, 'well we've sold out to the investors now, we really don't care what happens to the shareprice because it's not our problem!'

There seemed to be at least a couple of cases on the NZX recently were shareprices were tumbling, yet management were quite happy to quiet and just let it happen, much to the understandable dismay of angry posters on some threads.

Is there some sort of protective legislation? If not then checking to see the holdings of management in the stock certainly becomes very important!

Cheers,

NextBigThing

[born2invest]

Upside of share price going down:
- company can buy back shares at a cheaper price

Downsides of share price going down:
- company is more susceptible to have take over bids
- if the company wants to issue more shares, they have to do so at a lower price, meaning more dilution of shares
- the shareholders vote for the board of directions, less likely to vote again if share price plunges

History has shown that management that focuses on short term earnings and share price movements as opposed to long term fundamental improvements in their business tends to under-perform.

[CJ]

Because the company works for its owners. (In theory) Shareholders elect Directors who select CEO who selects managers who hire staff. A growing company allows internal promotions, pay rises, opportunities, a sense of achievement (dont underestimate this one).

[percy]

Often a company has to raise more capital,to either pay back debt which can be bank debt,so the SP will affect the company's capacity to borrow,and their relationship with their bank.
The same goes should the company want to grow via acquisition.

[percy]

Often a company has to raise more capital,to either pay back debt which can be bank debt,so the SP will affect the company's capacity to borrow,and their relationship with their bank.
The same goes should the company want to grow via acquisition.

[Merc]

I also had the same thinking. Then I bought Chorus.

On the ASB site there is a box called "Margin Lending Ratio". For Chorus the ASB ratio is 65% of the value of the company i.e. the bank would only lend up to that amount. As Chorus have borrowed vast sums from banks to invest in fibre by guess is that when the share price tanked then the bankers would have been thoroughly alarmed. Maybe, as the Government are shareholders, not to the point of asking for lump sum repayments but becoming very tight fisted about increased borrowing.

Think of it like a house. Banks will lend up to 80% of the value. If the house increases in value then all is well. If property prices tank the banks start asking for lump sum repayments to bring lending back to 80% to cover their risk in a mortgagee sale.