The Insanity of Caring About Stock Prices

“Oh my God Johnson, our stock has dropped to nothing. We’re ruined!.” Not the greatest quote from TV, I grant you, but when I watched Robocop 3 a decade ago, it struck my little mind that the share price of a company can make it or break it. And not just the firm, but the employees as well. In “Fun with Dick and Jane,” Jim Carrey convincingly pulls off the image that if your share price falls, it spells doom for the employees too.

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Share Prices

But when I studied Finance in my MBA, I never quite understood why companies cared so much about their stock price. After all, haven’t they already sold the shares in the IPO? And how can they control what the public thinks about their company anyway? It always seemed to me that people bought and sold stock based on their reputation, not on detailed analysis of their books. How can companies care so damn much about what people think about them?

Recently when there was a rumor that Steve Jobs had a heart attack, Apple’s share price dropped. There are two issues here. First of all, I’m not sure that the loss of Steve Jobs would have that great an impact on the performance of Apple. One doesn’t consistently produce great products for decades due to the genius of one man no matter how great. So there’s no reason to believe that the performance of Apple is going down if Jobs goes.

Second, I’m sure that everyone believed that it was just a rumor. But the funny thing about the stock market is that it doesn’t matter what you believe or don’t. And it doesn’t matter what everyone else believes or doesn’t either – what matters, is whether or not you believe whether or not others believe! If you believe that others believe that Steve Jobs had a heart attack, you must sell. If you thought that others were smart not to run at the sound of rumors, you would not sell either.

How in heaven’s name can companies seriously believe for one single moment that such whimsical things as the highly unstable temperaments of day traders mean anything at all?

I have read several reasons why companies have good reason to care about their stock price. Some reasons that I’ve heard are:

  1. The management owns a huge percentage of shares. Their personal wealth depends on the share price.
  2. The employees receive bonuses based on the share price
  3. Financing companies look favorably on companies with a good share price. Lower debt deals
  4. Hostile takeovers
  5. Prestige

Out of these, only the first and fourth reasons seem good ones. I can sympathise with the management if their personal wealth is inextricably linked to the company. Though if I were in their place, I wouldn’t place all my eggs in one basket. Who the hell would do something like that?

And of course, the threat of having your company taken over is a very real danger. A good reason to keep your price high.

However, I don’t understand why number 3 should exist. Don’t financiers look at the real performance of the company based on the accounts and other concrete information? How can they get any idea of the performance of a company solely based on the share price? Or is this one of those “Collective wisdom of the crowd” mantras?

Lots of questions.

I’m not a stud corporate worker and I probably don’t understand harsh realities of the corporate world. Maybe these guys have many more reasons to keep their share prices in the public market high. But I can’t see them.