Types of Corporate Actions

By David Gass

A corporate action can be defined as a decision undertaken by the mutual consent of the board of directors of a company. A corporate action creates a direct impact on the stakeholders of the company including the shareholders and the bondholders. Companies may or may not involve the shareholders to vote for the decision taken, depending on the nature of the corporate decisions. After undermining a particular corporate action, the investor gets a better picture about the financial performance of a company. Adequate knowledge about corporate actions is essential, since investors can decide whether to deal with the particular company’s stock or not.

Different kinds of Corporate Actions

The following are some of the common corporate actions, which the companies take.

Stock Splits: Also known as a bonus share, a company divides the outstanding shares in order to boost the liquidity of its stock. Although, the stock splits have very negligible impact on the company’s equity or net assets, the number of outstanding shares increases significantly.

Dividends: These can be categorized into cash or a stock dividend. Dividends are retained earnings of the company that can be announced semi-annually, annually or quarterly. In cash dividend policy, the shareholders get a pre-decided cash dividend per share. A stock dividend is somewhat different from cash dividend, wherein the shareholders get an extra share or more for every number of shares they hold.

Rights Issue: Under this corporate action, companies issue new shares to their existing shareholders. If the response from their existing shareholders is not favorable enough, then new shares are offered to the general public. Rights issue adversely affects a company’s earnings per share, commonly known as EPS.

Mergers and Acquisitions: The most significant of all the corporate actions is a merger or acquisition by companies. Acquisition happens when a company acquires the majority shares of the target company. A company surrenders all its existing stock to the agreed company under the said terms and conditions. The stock prices of the companies involved are affected by acquisitions to a great extent. The value of the target company’s stock usually increases, whereas the value of the acquiring company’s stock decreases for a temporary period. Shareholders of the companies and regulatory authorities have to approve these consolidation activities.

In addition to these primary corporate actions there are other related events like capital reduction, conversion of securities, interest payment, minority offers and suspension. The board of directors takes these actions due to various reasons. For instance, when they find excess capital they opt for capital reduction. Similarly, suspension occurs when the company finds that a drastic change in the price of the shares is about to happen.

There are various softwares and information available in the markets that provide the necessary guidelines to educate the investors. These softwares are readily available at an economical price for the benefit of the investing community. It makes no sense to invest your hard earned money in something you are not sure will reap you the necessary benefits!

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