A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions, such as a dividend (for equity securities) or coupon payment (for debt securities (bonds), may have a direct financial impact on the shareholders or bondholders. Another example is a call (early redemption) of a debt security. Other corporate actions, such as stock split, may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions, such as name change, have no direct financial impact on the shareholders.
The primary reasons for companies to use corporate actions are:
- Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus is another case where the shareholder is rewarded. In a stricter sense the bonus issue should not impact the share price but in reality, in rare cases, it does and results in an overall increase in value.
- Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed. Corporate actions, such as stock splits or reverse stock splits, increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares, thereby increasing the price.
- Corporate restructuring: Corporations re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability. Spinoffs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies.
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