BFL-Mar-22-15 How The Stock Market Affects Corporate Decision-Making

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The stock market reflects most occurrences in the real world, and corporate decisions informed by the market leads to high market value for the company. Decision-makers are directors, regulators, managers who cite the information on the price and then act accordingly. 

Do companies prefer to issue stock when the stock market seems irrationally heightened? Yes, it is true. 

How the stock market affects corporate decision-making

First, behavioural corporate finance approaches focus on how companies adapt the corporate policy smartly to exploit investor irrationality and market pricing. The asset pricing in capital markets, the behavioural inclinations of investors and market analysts impact corporate decisions, including raising equity and IPOs. Companies prefer to attempt to issue their IPOs during the bullish markets. 

Second, information in the market affects real-world decisions. Let us understand with an example. A CEO has announced a new investment in the company. It can be a merger or acquisition, setting up a new plant, or a loan to consolidate debts. On the next day of the announcement, your stock price goes down. The CEO may realise that some information in the market impacted negatively. It may be that the CEO might reconsider the decision. 

  • Theoretically, the timing of the IPO issue should not affect the pricing in an efficient equity market because, during any period, the company should get the right value for its new shares. But practically, the efficient market hypothesis is rejected and assumes that assets may be mispriced. It affects the corporate decision of the timing of the IPO. The stock market timing hypothesis is backed by evidence of poor post-IPO performance in operational results and stock returns. In a bullish market, the cost of raising equity declines, which encourages companies to issue new shares. As a result, high market valuations can be observed.

Thus, corporate and market timings are seen as favourable stock market situations. 

Timing practices can harm long-term investors participating in public offers. Generally, pre-IPO investors do not prefer to sell their IPO issues immediately. It may be due to selling restrictions with lock-up periods declared by the company.

What should investors consider while applying for IPOs?

An IPO investment can provide significant returns in the long run with the company’s growth. Investors need to research well about an IPO. 

Hype vs Reality

Check whether it is hype or reality before deciding to apply for IPO online. IPO issue is a complex process for a company that can take six months to years to be completed as it involves huge paperwork and techniques for the value estimation of the company. A hype about an IPO is a strategy to maximise the speculation in the market. Promoters may start to publicise the IPO even before an IPO hits the market, making it overrated due to such hypes. 

To avoid such risks, it would be best to go through various available financial statements to check the IPO issue and the company. Perform legal research on the company. This way, you can avoid an IPO with unnecessary hype. Do not forget about reading all information available in the IPO prospectus issued by the company. 

How to invest in IPOs

Retail investors can bid for an IPO online or offline. Online IPO application through demat account is preferred because of convenient processing. The IPO application process can be completed quickly. For a new demat account opening, you need to approach a SEBI registered stockbroker. If you get the allotment of the IPO issue, your IPO shares will be transferred to your demat account. 

Thus, the stock market impacts corporate decisions. Investors look at the timing of an IPO issue and then consider IPO investments for significant returns after going through different aspects.

Note – This article is not written by the author.

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About author
Ujwal Sharma is an Indian Award-Winning Entrepreneur, Investor and Digital Marketer. He is the Founder and CEO at Uzi World Digital. Follow Ujwal Sharma on Twitter - @Theujwalsharma
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