The term ‘corporate actions’ is one of the most crucial terms in the world of business and finance. The term holds immense relevance and value to anyone right from the CEO of a large corporation to the smallest of stockbrokers. A single corporate action can turn a company’s future on its head, for better or for worse. Since it is one of the essential concepts to be understood by anyone with the remotest interest in stock markets and shares, here is this humble attempt to elucidate it in simple terms for anyone eager to learn. Here we shall be looking at what is meant by corporate actions, their importance and relevance, different types of corporate actions with examples, how they impact the share market, how they are undertaken, and more.
What are corporate actions?
A corporate action is generally one that is initiated by a joint-stock company and can have an effect or material impact on its stakeholders. They usually follow a decision taken by the board of directors of the company with the approval of the shareholders. A corporate action can be something as minor as a change of name of the company that has little impact on its financial health. On the other hand, it can also be crucial like a merger decision or financially decisive one like the distribution of dividends or bonus to the shareholders. Depending upon the type of corporate action, it can either alter the value of the company’s share capital or keep it unchanged. A majority of corporate actions, in general, will serve as reflections of the company’s financial status and health. Those keenly observing the changes and fluctuations taking place in the share-market scenario can easily evaluate a company’s financial position and decide whether its shares are reliable or not by viewing the corporate actions initiated by it.
Why are corporate actions important?
Now that you have the basic idea of what a corporate action is, a question of curiosity, “What are different corporate actions?” must be popping up in your mind. However, before discussing it, let’s first try to answer the question ‘Why does corporate action happen?’ In other words, what are the reasons that compel a company to initiate such actions? There could be numerous reasons for a company to undertake a corporate action. Let’s see.
No business entity can function isolated from its environment. It means that it is constantly in interaction with its environment and needs to adjust to any changes that occur in it. For a company to survive and thrive, it needs to take initiatives in response to a change in its environment. For example, a medical equipment company manufacturing manual BP apparatuses may decide to merge with an electronic device manufacturer when it senses an increased demand for electronic BP apparatuses along with a decline in the demand for the manual ones.
Even when there is no sudden change in the environment, a company can undertake corporate actions. It could be a part of the company’s long-term plans and strategy. Based on the strategy, a company can initiate various corporate actions regularly such as the annual distribution of dividends or depending on various business dynamics.
Similarly, there can be many more reasons why a company initiates different corporate actions. Even when a company is about to wind up, it will have to resort to certain corporate actions for fulfilling legal formalities.
What are the types of corporate actions?
All the minor and major corporate actions together can form a lengthy list. For convenience, they are often classified into different types. They may be classified as mandatory and voluntary corporate actions. They can also be classified as actions that have a financial impact on the shareholders and those that don’t have any. There can be corporate actions involving a new entity such as merger corporate actions or takeovers. However, the corporate actions that are considered the most decisive are the ones involving a financial impact. Here, let us see what are types of corporate actions in detail, especially the ones involving financial impact.
1. Cash Dividends
Usually, dividends are a fraction of a company’s profit distributed among the shareholders. However, some companies may pay dividends in special cases even when there is no profit. It is not mandatory for any company to pay dividends to the shareholders. Instead, the profit value will be reflected in the value of the shares held by the shareholders. For instance, in June 2020, Qualcomm Incorporated, a leading telecommunications manufacturer, paid a dividend of $0.65 per share while another company, Square Inc., does not pay any regular dividends to the shareholders.
When a company pays you a dividend, it actually pays you the cash equivalent of a portion of the share value you hold. It will bring down your share value by that amount. Suppose you hold 100 shares of $25 each in a company, you have shares worth $2500. After one year, supposing the company gets a profit of 10%, your share worth is increased by 10%. i.e., you now hold $2500 + $250 = $2750 worth of shares. If the company decides to pay half of the profit as dividend, it means you get $125 as a dividend. This amount is taken from your share value. Thus, after you receive the dividend as cash, the remaining share value you have is $2750 – $125 = $2625. The following table illustrates this.
|Value per share||No. of shares you hold||Total value of shares you hold||Company’s profit percentage||Profit value on your shares||Total share value after adding profit||Dividend (Half of profit, in this example)||Remaining value of shares after paying dividend|
|$25||100||$2500||10%||10% of $2500 = $250||$2500 + $250 = $2750||$125||$2750 – $125 = $2625|
It is important to know the terminology of certain dates related to dividends.
- Dividend declaration date: This is the date on which the board of directors conducts a meeting and decides to issue the dividends.
- Record date: On this date, usually around 30 days following the declaration, the shareholder profiles in the company register are reviewed to shortlist those eligible for dividends.
- Ex-dividend date: Also known as Ex-date, this usually falls two days before the Record Date as the dividend issue is done on T+2 basis. The relevance of the Ex-date is that shareholders holding shares before this date alone are considered for dividends.
- Dividend pay-out date: It is on this date that the actual dividends are paid to the eligible shareholders in the register.
Different companies pay dividends during different times of the year and at different intervals. Based on it, dividends can be called by different names as mentioned below.
- Final Dividend: Some companies may distribute the dividend regularly once every financial year. Such dividend paid at the end of the financial year is known as the final dividend.
- Interim Dividend: It is paid at any time other than the end of the financial year.
- Trailing Twelve Months (TTM) Dividend: This is the dividend paid by calculation based on the last twelve consecutive months, which is a full year but doesn’t exactly coincide with the financial year period.
Some recent examples of cash dividends
1. AT&T Inc.: AT&T has been known for its consistent cash dividend payments. In December 2020, the company announced a quarterly dividend of $0.52 per share, maintaining its reputation as a stable dividend-paying stock in the telecommunications sector.
2. Procter & Gamble Co.: In April 2021, Procter & Gamble announced a quarterly cash dividend of $0.8698 per share, reflecting an increase of 10% from the previous level. This marked the 65th consecutive year that P&G had increased its dividend.
3. Johnson & Johnson: Another company with a long history of paying dividends, Johnson & Johnson announced in April 2021 a 5% increase in the quarterly cash dividend, bringing it to $1.06 per share. This was the 59th consecutive year the company had increased its dividend.
4. Coca-Cola Company: In February 2021, Coca-Cola announced its 59th consecutive annual dividend increase, raising the quarterly cash dividend by 2.4% to $0.42 per share.
5. Walmart Inc.: In February 2021, Walmart declared an annual cash dividend of $2.20 per share, indicating a steady commitment to returning value to shareholders.
6. Exxon Mobil Corporation: Despite the challenges in the oil industry, Exxon Mobil continued to pay dividends, announcing a cash dividend of $0.87 per share in April 2021, keeping it unchanged from the previous quarter.
7. Apple Inc.: In July 2021, Apple announced a quarterly dividend of $0.22 per share, continuing its regular practice of returning cash to shareholders following its reinstatement of the dividend in 2012.
8. Microsoft Corporation: Microsoft, too, has maintained a strong record of cash dividends. In September 2021, the company announced a quarterly dividend of $0.62 per share, representing a 11% increase from the previous quarter’s dividend.
These examples highlight the variety of industries and companies that continue to pay cash dividends, signifying confidence in their operations and a commitment to providing regular income to shareholders. The decision to pay, increase, or maintain cash dividends is often considered a strong signal of a company’s financial health and management’s confidence in future earnings. Please note that dividend payments can change, and it would be wise to consult up-to-date financial sources or a financial professional to get the latest information on cash dividends from these or other companies.
2. Bonus issue
Bonus is considered a reward the company pays the shareholders out of its reserves. It is a form of Stock dividends as no cash payment is done. This is in the form of additional shares based on a ratio or multiple of the number of shares already held by each shareholder. Suppose, the bonus is 2:1. Then the shareholder will get 2 additional shares for each share held by him/her. However, the total share value will not increase or decrease as the value per share is adjusted proportionately. i.e., if you hold 100 shares of $10 each, it becomes 300 shares of $3.33 after bonus issue. See the following table. The total share value remains unchanged at $1000.
|Bonus ratio||No. of shares held before bonus||Value per share before bonus||Total share value before bonus||Share value after bonus||No. of shares held after bonus||Total share value after bonus|
As the value per share comes down with a bonus issue, the company usually becomes accessible to smaller investors. Also, since the parameter of the issued share capital of the company looks attractive, it gains a better profile. However, its reserves have to face some depletion. The action doesn’t need an election as the total share capital remains unchanged.
Examples of Bonus issued by some Indian Companies
1. Reliance Industries Limited (RIL) – 1:1 Bonus Issue in 2017: In July 2017, RIL announced a 1:1 bonus issue, meaning that for every share owned, a shareholder received one additional share. This move was aimed at making the stock more accessible to retail investors by reducing the price per share. It also marked the 40th anniversary of the company being publicly listed.
2. Tata Consultancy Services (TCS) – 1:1 Bonus Issue in 2018: In April 2018, TCS declared a 1:1 bonus issue for its shareholders. Similar to the RIL example, this meant that every shareholder received one extra share for every share held. This was TCS’s second bonus issue, aimed at rewarding shareholders and improving liquidity.
3. Wipro – 1:3 Bonus Issue in 2019: Wipro, one of India’s leading IT companies, announced a 1:3 bonus issue in January 2019. For every three shares held by an investor, one additional share was allotted. The company stated that the bonus issue was to reward shareholders and enhance the marketability of their equity shares.
4. Infosys – 1:1 Bonus Issue in 2018: Infosys, another major player in the Indian IT sector, announced a 1:1 bonus issue in July 2018. The company’s decision was seen as a means to increase liquidity of the shares and widen the shareholder base.
5. Hindustan Unilever – 1:2 Bonus Issue in 2017: The consumer goods giant, Hindustan Unilever, announced a 1:2 bonus issue in November 2017. Under this arrangement, shareholders received one additional share for every two shares owned. This bonus issue was part of a broader strategy to enhance shareholder value.
6. Berkshire Hathaway – Notable Exception: Warren Buffett, the CEO of Berkshire Hathaway, has been notably resistant to stock splits or bonus issues, arguing that these actions often attract investors with a short-term perspective. The Class A shares of Berkshire Hathaway are among the most expensive publicly traded shares in the world.
This is a corporate action similar to a bonus and often confuses some investors between the two. However, it has its subtle differences. Stock-split is nothing but splitting the existing stock into factors. When the face value of a share stays at a very high level, it is advantageous to have a stock-split as it can make the price of shares affordable to more investors. For instance, a stock-split of 1:2 implies that a share is divided into two. With this division, the face value of shares also gets divided accordingly. However, the total number of shares now increases to double. A simple example is the stock-split of the shares of Britannia Industries in the ratio 1:2 in 2018. The face value was Rs. 2 per share, which became Re. 1 after the split. And the total number of shares changed from 250 million to 500 million to maintain the total stock capital of Rs. 500 million. See the table below.
|Initial face value of share||Total no. of shares before split||Total stock value before split||Stock split ratio||Face value of share post-split||Total no. of shares post-split||Total stock value post-split|
|Rs. 2||25 million||Rs. 50 million||1:2||Re. 1||50 million||50 million|
So how is stock-split different from the bonus issue? The main difference is that a bonus is issued using additional shares while in a stock-split, the increase in the number of shares occurs by splitting the existing number of shares. Also, the issued share capital remains unchanged with a stock-split, unlike in a bonus issue.
Examples of Stock-split
1. Apple Inc. – 4-for-1 Stock Split in 2020: In August 2020, Apple conducted a 4-for-1 stock split, meaning that each existing share was divided into four shares. If an investor owned 100 shares before the split, they would own 400 shares afterward, but the total value of the investment would remain the same. This marked the fifth stock split in the company’s history.
2. Tesla Inc. – 5-for-1 Stock Split in 2020: Tesla performed a 5-for-1 stock split in August 2020. If an investor held 10 shares worth $1,500 each before the split, they would have 50 shares worth $300 each after the split. This move was aimed at making the shares more accessible to retail investors.
3. Amazon – 3-for-1 Stock Split in 1999: Amazon executed a 3-for-1 stock split in January 1999. The company’s shares were trading at high prices, and the split aimed to make the shares more attractive to individual investors. After the split, the number of shares an investor owned would have tripled, while the price per share would have been cut to one-third.
4. Microsoft Corporation – 2-for-1 Stock Splits: Microsoft has conducted multiple 2-for-1 stock splits, most recently in 2003. For each share owned before the split, a shareholder would own two shares afterward. These splits have been used to keep the share price in a range that is attractive to individual investors.
5. Coca-Cola Company – 2-for-1 Stock Split in 2012: Coca-Cola executed a 2-for-1 stock split in 2012. This was the company’s 11th split in its history and aimed at increasing liquidity and broadening the investor base. Shareholders received an additional share for every share they owned.
6. Walmart – 2-for-1 Stock Split in 1999: Walmart has undergone numerous 2-for-1 stock splits throughout its history, with the most recent in 1999. The purpose was to make the stock more accessible to individual investors and ensure that the share price remained in a desirable trading range.
7. Alphabet Inc. (Google) – Unconventional Stock Split in 2014: Google’s parent company, Alphabet, conducted an unconventional stock split in 2014, issuing a new class of non-voting shares. This allowed the company’s founders to maintain control while still expanding the number of outstanding shares. Shareholders received one new Class C share (non-voting) for each Class A share (one-vote) they owned.
4. Rights issue
Rights issue is issuing additional shares to the existing shareholders. This is usually done to generate additional capital. Though it is similar to issuing fresh shares through an IPO (Initial public offering), in this case, the shares are not issued to the public. It is only offered to the existing shareholders. If the ratio of the rights issue is 1:5, it means that you are eligible to buy 5 shares for every share you hold. Unlike any of the corporate actions listed above, the rights issue requires the shareholders to pay money to buy the additional shares. Since the transaction takes place directly between the company and the individual shareholders, the fresh shares usually cost comparatively less than the market price. A rights issue can be an indication of the company’s prosperity and stability as it is confident enough to generate new funds to expand the business into new arenas.
Examples of Rights Issues
1. Vodafone Group – £19 Billion Rights Issue in 2006: Vodafone, the British telecommunications giant, announced a massive rights issue in 2006, aimed at reducing the company’s debt. Shareholders were given the right to buy additional shares at a discount. This was one of the largest rights issues in UK corporate history at the time.
2. Royal Bank of Scotland (RBS) – £12 Billion Rights Issue in 2008: In the wake of the 2008 financial crisis, RBS turned to a rights issue to strengthen its capital base. The bank’s existing shareholders were offered the right to buy additional shares at a discounted price. This was a move to shore up the bank’s balance sheet amid the global banking crisis.
3. Deutsche Bank – €8 Billion Rights Issue in 2017: In March 2017, Deutsche Bank announced a rights issue aiming to raise €8 billion. This capital increase was part of the bank’s broader strategy to restructure and restore profitability. Existing shareholders were given the opportunity to buy new shares at a significant discount to the prevailing market price.
4. General Motors (GM) – $15.5 Billion Rights Offering in 2003: General Motors conducted a rights offering in 2003, aiming to raise $15.5 billion to reduce its pension obligations. Existing shareholders were offered the right to buy bonds with attached stock warrants, providing them with a potential equity upside.
5. Bharti Airtel – INR 25,000 Crore Rights Issue in 2019: Bharti Airtel, an Indian telecommunications company, initiated a rights issue in 2019 to reduce debt and fund capital expenditure. The rights issue allowed existing shareholders to subscribe to new shares at a discount, helping the company raise INR 25,000 crore (approximately $3.5 billion).
6. Lufthansa – €2.14 Billion Rights Issue in 2021: German airline Lufthansa announced a rights issue in 2021 to repay state aid received during the COVID-19 pandemic. Existing shareholders were given the opportunity to purchase additional shares at a discount, contributing to the airline’s efforts to stabilize its financial position.
7. HSBC – £12.5 Billion Rights Issue in 2009: HSBC, one of the world’s largest banks, announced a rights issue in 2009 to strengthen its capital base amid the global financial crisis. This rights issue allowed the bank to raise £12.5 billion by offering additional shares to existing shareholders at a discount.
5. Buyback of shares (Tender offer)
Buyback is the process in which the company purchases back some of its own shares from the shareholders. This could be an indication that the company has a healthy cash reserve. Buyback is performed by making a tender offer to the shareholder. There can be multiple reasons why a company undertakes a buyback. A buyback can result in any of the following outcomes:
- Consolidation of the company’s stakes
- Preventing the share price in the market from going too low
- Creating a demand for the shares in the market thus increasing its price
- Preventing other stakeholders from taking over the company
Examples of Buyback of shares
1. Apple Inc. – $90 Billion Buyback in 2021: In April 2021, Apple announced a share repurchase authorization of $90 billion, which was part of its capital return program. The technology giant regularly engages in buybacks to return excess cash to shareholders and boost earnings per share (EPS).
2. Microsoft Corporation – $60 Billion Buyback in 2021: Microsoft authorized a $60 billion share buyback program in September 2021, reflecting the company’s strong cash position and desire to return value to shareholders. This followed a history of buybacks by the company.
3. Exxon Mobil – $10 Billion Buyback over Several Years: Exxon Mobil, one of the world’s largest oil and gas companies, conducted a share buyback program of $10 billion spread over several years. This was part of the company’s strategy to manage its capital structure and return value to shareholders.
4. Walmart – $20 Billion Buyback in 2017: In 2017, Walmart announced a $20 billion share buyback program over two years. This was aimed at utilizing excess cash and showing confidence in the company’s growth prospects.
5. Cisco Systems – $25 Billion Buyback in 2018: Cisco Systems, the technology company, authorized a $25 billion share buyback in 2018. The company engaged in buybacks as part of its ongoing strategy to manage its capital structure and reward shareholders.
6. PepsiCo – $15 Billion Buyback in 2019: PepsiCo, the multinational food and beverage giant, announced a $15 billion share buyback program in 2019. This move was seen as a way to enhance shareholder value and utilize excess cash effectively.
7. Alphabet Inc. (Google) – $50 Billion Buyback in 2021: Google’s parent company, Alphabet, authorized a $50 billion share buyback in 2021. This was part of a broader capital return program to shareholders and reflected the company’s strong financial performance.
8. Boeing – Suspension and Resumption of Buybacks: Boeing provides an example of how buybacks can be halted and resumed in response to business conditions. The aerospace company suspended its buyback program in 2019 following the 737 MAX crisis. As of my knowledge cut-off in September 2021, the company had yet to resume its buyback activities.
Now, what is a merger corporate action? Sometimes, two companies can merge to become a single new entity. The resulting company is called a merger. It is a corporate action different from the ones like dividends or bonus issues. It transforms the entire profile of the companies involved. In 1998, Daimler AG, the German automobile corporation, and Chrysler, the US automotive manufacturer, merged to form the DaimlerChrysler AG. This way, the best of both companies can be utilized for the advantage of the business. It results in the benefits of better economies of scale, chances for diversification, bigger market share, increased sales, etc.
Examples of merger
1. Exxon and Mobil – 1999: In 1999, Exxon and Mobil, two of the largest oil companies, merged to create Exxon Mobil Corporation. This $81 billion merger created the world’s largest publicly traded oil company at that time.
2. AOL and Time Warner – 2000: AOL’s $164 billion acquisition of Time Warner in 2000 was one of the largest media mergers in history. The idea was to combine Time Warner’s media content with AOL’s internet platform, but the merger faced challenges and was eventually considered a failure.
3. JPMorgan Chase and Bank One – 2004: JPMorgan Chase acquired Bank One in 2004 for $58 billion, making it one of the largest banking institutions in the United States. The merger significantly expanded JPMorgan’s consumer banking business.
4. Disney and 21st Century Fox – 2019: In 2019, The Walt Disney Company acquired 21st Century Fox in a $71.3 billion deal. The merger included Fox’s film and television studios, expanding Disney’s content library and positioning it to compete in the streaming media market.
5. AT&T and Time Warner – 2018: AT&T’s $85.4 billion acquisition of Time Warner in 2018 was aimed at combining Time Warner’s media assets with AT&T’s distribution network. The merger faced legal challenges but was eventually approved.
6. Dow Chemical and DuPont – 2017: In 2017, Dow Chemical and DuPont, two of the largest chemical companies, merged in a $130 billion deal. The merged entity, DowDuPont, later split into three separate public companies specializing in agriculture, materials science, and specialty products.
7. CVS Health and Aetna – 2018: Pharmacy giant CVS Health acquired health insurer Aetna for $69 billion in 2018. This merger was seen as a transformative move to create a new healthcare model that combined CVS’s retail pharmacy and healthcare services with Aetna’s insurance expertise.
8. Anheuser-Busch InBev and SABMiller – 2016: In 2016, beer giants Anheuser-Busch InBev and SABMiller merged in a $107 billion deal. The merger created the world’s largest beer company, controlling about one-third of the global beer market.
9. United Airlines and Continental Airlines – 2010: United Airlines and Continental Airlines merged in a $3 billion deal in 2010, creating one of the world’s largest airlines by passenger numbers.
10. Glaxo Wellcome and SmithKline Beecham – 2000: Two leading pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham, merged in 2000 to form GlaxoSmithKline, a global pharmaceutical leader.
A demerger is a corporate restructuring process in which a company’s business operations are divided into two or more independent and separately managed entities. This is the opposite of a merger, where two or more companies combine to form one entity. Demergers are often undertaken to enhance business focus, increase operational efficiency, or respond to regulatory or strategic challenges.
Examples of de-merger
1. Hewlett-Packard (HP) Demerger – 2015: In 2015, technology giant Hewlett-Packard underwent a demerger, splitting into two separate publicly traded companies: HP Inc. and Hewlett Packard Enterprise (HPE). HP Inc. retained the personal computer and printer businesses, while HPE focused on enterprise IT solutions, including servers, storage, and networking. The demerger was aimed at allowing each entity to specialize and innovate in its respective market. The split was completed on November 1, 2015, with shareholders receiving one share of HPE for every HP share they held.
2. Alcoa Demerger – 2016: Alcoa, a leading producer of aluminum, split into two independent companies in 2016: Alcoa Corporation and Arconic. Alcoa Corporation continued with the traditional aluminum production business, while Arconic focused on engineered products and advanced materials. The split aimed to allow each business to pursue its strategies and growth opportunities. Shareholders of the original Alcoa received one share of the newly formed Alcoa Corporation for every three shares of the pre-demerger Alcoa stock they held.
3. Fiat Chrysler Automobiles (FCA) and Ferrari – 2016: In 2016, FCA completed the demerger of the luxury car manufacturer Ferrari. The idea was to unlock the value of the Ferrari brand, allowing it to pursue its growth strategies independently. FCA shareholders received one Ferrari share for every ten FCA shares they held. The demerger allowed Ferrari to focus on its luxury branding and high-end market while enabling FCA to continue as a mass-market automaker.
4. British Gas Demerger – 1997: British Gas underwent a major demerger in 1997, resulting in the creation of three separate companies: Centrica, BG Group, and Transco. Centrica took over the retail gas supply business, BG Group focused on exploration and production, and Transco was responsible for the transportation and distribution. This separation was designed to promote competition and efficiency in the UK’s energy market.
5. ABB and Power Grids Business – 2020: Global technology company ABB completed the divestment of 80.1% of its Power Grids business to Hitachi in 2020. This demerger allowed ABB to focus on its core businesses in digital industries, automation, motion, and electrification. At the same time, the Power Grids business could leverage Hitachi’s resources to expand in the energy sector. The deal was valued at approximately $11 billion.
6. ITC and ITC Infotech – 2021: Indian conglomerate ITC Limited announced the demerger of its IT subsidiary, ITC Infotech, in 2021. The goal of the separation was to provide ITC Infotech with the autonomy to pursue growth opportunities in the technology sector, independent of ITC’s core FMCG, hotel, and paper businesses. Shareholders of ITC were to receive shares in the new entity proportionate to their existing holdings.
The above listed are some of the major and most common corporate actions. They are not all. There are many more corporate actions such as warrants, conversion, takeover, consolidations, etc.
What are Mandatory and Voluntary corporate actions?
Though we discussed various types of corporate actions, they can all be classified under two broad groups, namely, Mandatory corporate actions and Voluntary corporate actions.
- What are the mandatory corporate actions? – Those are corporate actions that are mandatory for the shareholders to participate in. There is no option for the shareholder to stay away from such corporate actions. Cash dividends, bonus issue, stock-splits, mergers, etc. are all examples of mandatory corporate actions. A ‘mandatory corporate action with choice’ is one that gives certain options to the shareholder in dealing with the mandatory action.
- What are voluntary corporate actions? – In contrast to mandatory corporate actions, voluntary corporate actions are those which the shareholders have the freedom to either participate in or ignore. Examples are rights issue, buyback of shares, delisting the company, etc. The shareholder is under no obligation to participate in such actions if he/she doesn’t want to.
How do corporate actions affect the share market?
Armed with sufficient knowledge about the various corporate actions from the discussion so far, let’s now try to answers certain very important questions such as “How corporate actions affect share prices?” as such are the questions investors are concerned about the most when they think about corporate actions.
Corporate actions can have a serious impact on shareholders and bondholders financially, though not all. The explanations to the question “How do corporate actions affect stock price?” may not always be convincing to some investors since the impact may not be direct or immediate. Certain corporate actions can bring indirect financial impact too. Let’s now have a brief look at the impacts some of the above corporate actions can have on the share market.
- Dividends: The value per share decreases as the dividends are nothing but cash paid to the shareholders after taking out some amount from the shares they hold.
- Bonus issue: The main impact of issuing bonuses is again the reduction of the share prices as the number of shares is increased without changing the total value of shares. The reduction is proportionate with the bonus ratio.
- Stock-split: A stock split also immediately causes a drop in the share value by the proportion of the split. It can also cause more liquidity which may bring down the stock prices at a subsequent point in time.
- Rights issue: As the number of available shares in the market increases with a rights issue, there is a dilution in the stock price and a high likelihood of share prices going down.
- Buyback: The buyback creates an increase in demand for the shares as the availability of the outstanding shares becomes less. This can create a sudden increase in the market share price for a short time.
Corporate actions and it’s impact on NAV
Since NAV (Net Asset Value) of an entity is its total assets minus the liabilities, any corporate action that affects the assets of the entity can also affect its NAV. It will be reflected on the NAV of the company on the date a particular corporate action takes place. Hence the effect of corporate actions such as dividends, buyback, etc. must be taken into consideration while calculating the value of NAV anytime.
How are corporate actions undertaken?
Corporate actions are initiated as a decision by a meeting of the board of directors. Once the decision is made, the information is distributed to each shareholder through appropriate notifications. The shareholder then has to play their part in the corporate action as necessary.
- What is a corporate action notification? – Once the corporate action decision is made by the company, it is notified to the shareholder. The notification can be through various convenient channels, mostly electronic communication. The shareholder has to then take necessary action on their part if necessary.
- How do you track corporate actions? – For listed companies, all the required information will be available with the stock exchanges. The information from there is distributed through various communication channels and agencies. Nowadays it is easy to track the progress of corporate actions through electronic means, including various mobile apps.
An appropriate understanding of the most common corporate actions of a company is essential for anyone dealing with shares and finance. It will help to get a clear idea of the financial health of a company. With the understanding, one can easily evaluate the share value of any entity and the knowledge will positively guide one’s decision to buy or sell its shares.
Hope the above discussion has covered the topic elaborately and simply enough to enlighten anyone who looks for such knowledge. The discussion has covered points such as the concept of corporate actions and types, examples of corporate actions and its impact on share prices and NAV, the process of undertaking a corporate action, the role of a shareholder in a corporate action, etc. and more, with sufficient details.