Which Best Describes Why A Company Issues Stocks?

Why Do Companies Issue Stocks?

Raising Capital for Growth

When a company sells new shares in an IPO or follow-on offering, it brings in cash that can be used to invest in new equipment, hire more employees, acquire other companies, or pursue other business objectives. Issuing stock allows a company to tap into investors' savings to fuel expansion.

Going Public for Liquidity

An IPO also creates liquidity for a company's founders and early investors. By listing shares on a stock exchange, there is now a public market where stockholders can sell some or all of their shares. This gives the founders and early investors options in managing their finances.

Fund Acquisitions

Once public, a company can also use stock as currency for acquisitions. Stock acquisitions have the benefit of allowing more flexibility in deal structure compared to strict cash deals. Tax impacts may also be more favourable for sellers receiving stock.

Enhanced Company Image

Going public and trading on a significant stock exchange boosts the profile and reputation of a company. Being a public company signals achieving a specific size and scale, stability, and adherence to regulatory standards. A publicly traded stock creates publicity and promotes name recognition.

Shareholder Wealth Creation

Selling stock also creates wealth and rewards stakeholders like company founders, employees, and investors. Stockholders benefit through capital appreciation if the stock price rises over time, allowing them to grow their money.

Aligning Incentives

Giving employees stock options or restricted stock units helps incentivize them to work hard and contribute to the company's success. Equity compensation helps attract and retain top talent motivated to see the company thrive.

Strategic Flexibility

Having publicly traded stock provides more strategic flexibility compared to remaining private. With a widely traded currency in its shares, a company has more options regarding acquisitions, capital raising, and partnering with other firms.

Enhanced Visibility & Prestige

Intangible benefits like increased visibility, prestige, and reputation come with being a public company. Having a well-known stock ticker trading on a significant exchange carries cachet.

Access to Capital Markets

Companies that maintain their listing continue to have ongoing access to capital through public markets. Follow-on offerings allow periodically raising fresh capital via stock sales after the IPO.

Shareholder Discipline

Being publicly traded instils discipline around company operations and strategy. Going public requires heightened organizational rigour regarding financial reporting, auditing processes, and internal controls.

Conclusion

The decision to "go public" has multifaceted advantages like access to capital, liquidity, growth funding, incentive alignment, prestige, and ongoing financing options. With thoughtful leadership, companies can utilize public markets while avoiding pitfalls like short-term thinking.