How Corporate Actions Affect Stock Prices More Than Anything Else

How Corporate Actions Affect Stock Prices More Than Anything Else

But first, what exactly is a corporate action? And why does it matter?

According to Investopedia,

A corporate action is any activity that brings material change to an organization and impacts its stakeholders, including shareholders, both common and preferred, as well as bondholders.

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Corporate actions includes:

  • Stock Split and reverse split (consolidation)
  • Spin-Offs
  • Dividend Payouts
  • Mergers and Acquisitions
  • Bonus Issue
  • Rights Issue
  • Share buybacks
  • IPO

Corporate actions are important source of indicators for the retail investors to monitor the company’s direction and effectively, the share price. There are some rules that investors and traders have to take note of, according to Li Guang Sheng (a top tier remisier and veteran community member):

  • Officers and employees of the Company two weeks before the announcement of the Company’s financial results for the first three quarters and one month prior to the announcement of the full year results (“Black-out Period”). Usually there will be internal memo to notify and remind all Directors, officers and employees of the Company on compliance with the best practices on dealing in securities pursuant to Listing Rule 1207(19)(c), in not dealing with the Company’s securities during the Black-out Period. The Company, its Directors and officers should be aware that the Company should not deal in its own securities (including undertaking any share repurchases) during the Black-out Period. Therefore, the Company would wish to complied with the Listing Rule 1207(19)(c) and not run foul with SGX.
  • If the players of the company shares belong to insiders, then during this period there may be less buyers and harder for you to run or sell your shares. Also if the company is undergoing share buyback and supporting the share prices through daily share buy back, the price may tank during the 2 weeks of no buying from the company or 4 weeks if it is the full year listing result period. So for those who trade heavy, be prepared to reduce your position 2 weeks prior to quarter result announcement due to less liquidity.
  • Also take note on listed company share buy back rules,
    • a) on-market purchases should not exceed 5% above the average closing market prices of the share over the last five market days;
    • b) details of purchases to be released to the SGX-ST, if it is non-market purchases, by 9am on the next market day, or, if an off-market acquisition, by 9am on the second market day after the close of acceptance.

Watch this quick video of Guang Sheng where he explains why corporate actions are so important:

IPO is also another important corporate action. An Initial Public Offering, is the very first sale of stock issued. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors. Today there is no consistency in how IPO subscription rates are reported. After the close of an IPO and before the stocks gets trades on the Singapore Exchange, investors will scanned the issuer’s ballot results announcement to get a estimate of market demand for the offering. The issuers are suppose to dispose a subscription rate” reflecting the true level of demand for the offer”. Problem is, the rulebook does not specifically say how the subscription rate should be counted, and it provides investment bankers for creativity.

Here are the key pointers by Guang Sheng to note before you subscribe to an IPO:

1. Profitability of the Group – Analyse the group financial statements. The previous quarter has to be higher then the current quarter for it to be sustainable. The figures have to be consistent.

2. Value of the Company – Does the company have any unique values and contribution to the community.

 3. Valuation of the company resources – Eg. Natural resources are hard to valuate as such assets are subjective, it has to be done by expertise in the field. Management credibility is very important in this aspect.

4. Big 4 Auditors – Best to have the most trustworthy auditors to audit the group.

5. IPO sentiment in the local market – It could be easily manipulated. The number of shares can be tightly controlled, it does not solve if there is an overall negative market sentiments. It also depends on the volume sold to the public, when the Management are holding a more then 80% of the shares, trading post listing will will be limited as shares are tightly held.

He also mentioned that:

If the ballot ratio is 10%, then every 10 account usually 1 will get based on probability. Using Kimly as example, if I get some I will make a handsome profit but if I do not get I lose $2. IPO is all about luck too, and you need to be tactical when apply. Usually if you do not know how to do IPO is best not to apply or try. As good IPO you get very little to none while lousy rubbish you tend to get all and is a disaster usually if you apply 10000 get 10000 as 9 out of 10 time is below water or open same price as IPO price.

To understand more about the IPO process, check out his original post about IPO strategy.

Another strategy to react on is the private placement of shares rolled out by the Big Boys during the IPO period. Guang Sheng shared on using economic game theory to understand the insight and analyse the chances whether after private placement would the share price increase or decrease. The amount invested by each investors and the motive behind placing out shares and to whom(especially big) are important factor to take note.

Private placement is good as the company can raise fund and achieve its objective and investors who invest could get the shares cheap and at a discount. It is not always the case that the placement price is at a discount because some strategic investors just want a pie of the company but there is not enough shares in the market for him/her to accumulate, so they pay a premium instead. Therefore when there is corporate action, it involve big money, no one want to lose, so there is a chance there may be action in the share price after the placement of shares. It could be justifiable for the price movement as if the shares are placed out to well known names, the company can justify the share rise and attribute it to euphoria (feel good) factors.

Another way that the company can justify should the share price rise as if placed out shares to well connected people like Oei Hong Leong, as Mr Oei could use his China connection for instance to bring in business or get strategic alliance for the company he just invested with his strong connections. It is a win win situation for him and the company he invested because the share price move up and he makes money from it. On the other hand the company raises capital and may get good opportunities from their new investors. But at your own discretion, not everything will turn out to be what you anticipate, as I have seen after investing, people may quarrel and things may turn awry and sell out. Investment have risks so always do your due diligence.

For IPO private placement, is good to see who the shares are place to, especially if investors cannot apply through ATM and in mist cases all must be done by private placement. In the scenario where all the shares are held in their hands of these close knitted group, and public got no access to the shares, most likely the price of the share will be up on opening. But a note of caution, if fundamentals are not there, beware of “pump and dump” as once the Big Boys exit this counter, we will never know when the counter will play up again. Some shares may go up for years after IPO hence I have no fixed formula to determine when to buy and sell. Is good to scrutinise the investors who invested if it is all private placement and ensure they do not offload. As long as the shares are not flooded, there is “hope” that the share price may continue to go up further.

In summary, you can see that corporate actions affect share prices more than anything else because it is a company’s management that truly influences its share price. If we know how Big Boys really think, investors could possibly mimic the Big Boys footsteps and think about the rational behind to avoid chasing stocks late into action and became “stocks collectors or long-term investors”.

Guang Sheng is an expert on capitalising on corporate actions of companies to generate a profit.

Strategic Investing: Taking Advantage Of Corporate Actions

He is the provider of the subscription, Strategic Investing: Taking Advantage Of Corporate Actions, which alerts his subscribers on latest corporate actions that will affect share prices significantly. Click the button below to find out more about this special service:

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