Many factors, from fluctuations in interest rates to global politics may influence investors' valuation of a stock. Sagging stock prices can indicate a troubled company, but stock prices often don't have an immediate impact on a company's operations. However, severely depressed prices can force companies to adjust their business strategies.
A company with a low stock price faces the possibility of hostile takeover bids from competitors. In these cases, a company may devote assets for growth, retain earnings or issue bond debt to finance a stock buyback in order to develop a controlling share in stock. Because capital must be devoted to staving off a potential takeover, growth or internal improvements may be delayed as the company is put on the defensive.
A company that becomes concerned about its lower stock price may move to increase its price-to-earnings ratio, and deliver larger dividends to investors. This is done with the idea that increased investor profits will lift the stock's price. Companies may choose strategies to improve earnings, such as slowing growth and retaining fewer earnings, downsizing the workforce and improving efficiency. Other strategies a company may employ include repurchasing its own shares, a strategy that raises prices without raising shareholder value on paper, or renegotiating bond debt.
If left unaddressed, a low stock price may hamper a company's ability to issue stock in the future, which can then impede its ability to continue to grow or meet other benchmarks. Because investors seek stocks that will improve in value, a stock that has declined may scare investors away. Because of this, operating budgets and strategies may be altered to help improve stock performance. This is done either through streamlining efforts through improvements in efficiency, such as reorganization, or reallocating assets to pay down debt or increase earnings.
Although stock prices may influence a company's operations, they're usually seen as an indicator of a company's financial performance. Investors value stocks based on several valuation formulas, although the most simple way is to divide the annual dividend per share by the rate of return an investor seeks. An investor who seeks a return of 7 percent on a stock that pays annual dividends of $3, would value the stock at $42.85. Because of this, as common interest rates fluctuate, investors' desired yield may change the intrinsic value of a stock.
- Economics Help.org: How Share Prices Affect Companies
- University of Chicago Booth School of Business; What Drives Companies to Repurchase Their Stock?; Daniel A. Bens, M.H. Franco Wong, Douglas J. Skinner
- Pomona College: What Affects Long Term Stock Prices?
- James Madison University: Chapter 8 - Investing in Stocks
- Comstock/Comstock/Getty Images