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When a stock price rises, does the company get more money?

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3 Answers

up vote 11 down vote

Not directly. But companies benefit in various ways from a higher stock price.

  • Companies can and do issue "secondary offerings" - the company (and thus shareholders, indirectly) sells new stock for cash. Existing shares are diluted, but the company may be more valuable since it has more cash.
  • Companies can use their stock to make acquisitions or other deals. Higher stock price means fewer shares are paid for the same cash value.
  • Companies dilute shareholders by issuing stock compensation to employees, which shows up (these days) as an expense on the financial statements, lowering EPS to reflect the harm to shareholders. If the stock price is higher, fewer shares are needed to make employees happy.
  • A company with a high stock price is not as vulnerable to a takeover. In a takeover, shareholders might receive less than the company is worth. Though generally at least some parties will feel the takeover is a good deal that gives shareholders more than the company is worth - after all shareholders are getting more than the stock price.

One way a high stock price can hurt a company is that many companies do share buybacks when the price is too high. Economically speaking, a company should only buy back shares when those shares are undervalued. But, management may have incentives to do buybacks at irrationally high prices.

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what about liability? Is there any correlation between the stock valuation and the amount of liability? – user1770 Apr 27 '11 at 9:52
I can't think of a liability concern with a high price, unless the company obtained the high price by lying (illegally pumping up the stock). – Havoc P Apr 27 '11 at 13:37
up vote 4 down vote

No.

A company issues stock in order to raise capital for building its business. Once the initial shares are sold to the public, the company doesn't receive additional funds from future transactions of those shares of stock between the public. Furthermore, the company can't issue more shares of stock to the public without shareholder's consent, which is difficult if not impossible to get since it would dilute the stake of each share, effectively devaluing it.

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There's usually (almost always?) headroom between the amount of shares the board is authorized to issue and the amount of shares that have actually been issued. For example, look at this old Apple 10K: "1,800,000,000 shares authorized; 835,019,364 shares issued and outstanding". That means that Apple has nearly a billion shares they could issue without seeking shareholder approval. A company like Apple is issuing new shares all the time (employee stock options, for example). – bstpierre Apr 28 '11 at 21:01
up vote -2 down vote

When a stock price rises, the company's assets are worth more. This doesn't mean it gets more cash directly, but it can liquidate (= sell) some of its stocks for a higher return than before.

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4  
I voted this down because I don't think it's accurate. The value of a company's assets do not depend on the price of it's stock. The inverse may be true... when the value of a company's assets rise, investors who follow the company may take notice, see that as a good business indicator, and want to buy more of the stock, which drives up the price. – Mike Piche Apr 26 '11 at 23:52
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Also, a company does not "own" stock in itself that it can "sell". Doing so would mean issuing additional stocks which would dilute the existing shareholders' stake in the company. This is illegal without shareholder approval. – Mike Piche Apr 26 '11 at 23:59
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@Mike Piche - what about companies that only issue, say, 10% of their available shares, retaining the rest? Then they certainly have "some of its stocks" that it can sell later. – warren Apr 27 '11 at 20:17
@warren: You're thinking about "authorized" versus "oustanding". For example, a company may have 1M shares "authorized", which is the amount the board is allowed to sell in the market. But that company may only have 100K "outstanding", which is the actual number of shares that exist. The other 900K shares don't exist, they aren't kept on the company's books, and they don't count towards assets. – bstpierre Apr 28 '11 at 20:56

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