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From reading various books, I am under the impression that managements usually dislike it when their stock price gets too low. I am not sure why. So my questions are:

  • Given that the job of management is to manage the operations of the company, why are they concerned about the stock price at all?

  • Is there any disadvantage to the management when stock prices are very low?

The only reason I can think of is that it would be hard to acquire other companies using stock when the stock price is low. However, if management has no intention to do mergers and acquisitions, I don't see why they would care about the stock price at all. I don't see how stock prices can affect regular company operations in any way.

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It depends on the definition of "very low".

Any given stock exchange is going to have a minimum price at which a stock has to trade in order to stay on the exchange. For the New York Stock Exchange, for example, that is $1. If a stock stays below that price, the company will be de-listed and would become a penny stock. In addition to sending a terrible signal to investors, the lack of liquidity for an OTC stock makes it less valuable and a large number of institutional investors (pension funds, mutual funds, etc.) are going to be unable or unwilling to continue holding the stock which will force a sell-off.

If a stock is in no danger of being de-listed but is merely trading below where management subjectively thinks it ought to be, that implies that investors and analysts are, in management's eyes, excessively pessimistic about the company's future. That pessimism is undoubtedly going to make it more expensive and/or impossible for the company to raise money in the bond market which most companies do on a regular basis for funding. If analysts are pessimistic about the stock price, they're likely going to assign a lower rating to the company's bonds which means the company will have to pay a higher interest rate.

Most public companies also use stock and options to compensate key employees. When stock prices rise, that means companies have to pay out less in salaries to remain competitive and that means that key employees are likely to have "golden handcuffs" that keep them working at the firm in the form of options and shares that will vest over time. That reduces turnover and tends to make the company more efficient.

Of course, the same managers that are worrying about the stock price are also likely to be part of any such incentive scheme so they will personally benefit when the stock price goes up. It's rather common for the CEO of a Fortune 500 company, for example, to get the majority of his or her compensation in the form of stock and/or options. If the stock price increases, the CEO's personal wealth goes up significantly.

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Quick answer

  • As a general rule, the stock price of a company indicates how good is the company.

  • A lot of companies offer stock options to upper management employee, if the stock price gets lower they lose money.

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Imagine there are two companies in the same industry, and the same country, and the same stock market. One has a current share price of $50 a share, and the other has a share price of $75 a share.

which is a better investment? which is a better company?

Let me restate it. Imagine two companies one with a share price of $50 and one with a share price of $75. Which is better?

With no other information it is impossible to judge which one is better. The share price, unless the stock price is so low that they are going to be de-listed, doesn't tell you anything about the quality of the company.

If you knew the price change in the last 12 moths that will tell you something. If you knew how sales were changing, or how their market share in the key parts of their industry were changing you can estimate how the share price might change in the next 12 months. But in a vacuum share price is meaningless.

Management cares if the price is dropping. That means the market is concerned. But $75 per share is essentially the same as $50 a share unless you know more about a company.

Some companies like to keep the price in a range because it makes it seem more accessible to the average person. Some companies never split because it makes the stock seem more rare or exclusive.

A stock with a share price of $50 or $75 makes no difference in the ability to get involved in mergers or acquisitions. The key metric in that case is how much is the total value of the two companies. That total value is price x number of shares. Even if the company does a split to change the stock price it also changes the number of shares, and that keeps the total the same.

Share price, in a vacuum, is meaningless.

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