Economic Warfare

[motorfirebox]

I've been thinking about the "it's just stock price" argument, and I'm not sure it holds water for several reasons. The simplest consideration is that falling stock prices make it harder to raise capital by selling stock. More broadly, a drop in stock prices can mean a drop in debt to equity ratio for companies--like investment banks--whose debts are publicly traded. This can, again, make it more difficult to raise capital, since the debt/equity ratio is often used to assess investment risk. A specific issue with the debt/equity ratio is that a high ratio can violate one or more debt covenants, forcing a company into unprofitable actions in order to get out of default.

Another facet is the effect falling share price can have on the board of directors. The directors' positions rely on shareholder confidence, which drops when share prices fall. So for that and other reasons, a company might very well choose to reduce their profit margin in order to maintain a higher share price (for instance, buying back shares if the price drops too low).