“What Is” a Corporate Action?

A corporate action is a step taken by a publicly traded company that usually sets off a process that impacts the shareholders of a stock. Generally, corporate actions provide investors with more transparency into a public company’s financial state by letting investors observe how each action influences the price of a stock. Ultimately, it should allow investors to decide if they should keep a stock or sell it.

Some examples of corporate actions include: stock splits, dividends, mergers and acquisitions, and spinoffs. Each corporate action serves a different purpose.

A stock split is when shares of a stock are divided, lowering the price of the stock per share. Such an action increases the liquidity of the share on the market, making it more attractive to investors. Stock splits along with reverse stock splits are used to change the price of the stock, influencing the price per share and thus the number of stockholders.

Dividends come in the form of a cash or check and occur when a certain amount of money is given to each shareholder of a stock. Dividends, for example, can help return profits to investors. Another way to distribute income is with a coupon or bonus payment.

A merger is when two or more companies combine in order to obtain greater profits. Mergers generally occur between two complementary firms. An acquisition is when one company is taken over by another, although the company being bought out may not necessarily be in favor of the transaction. Mergers and acquisitions generally occur when a firm is restructuring due to market conditions. Mergers and acquisitions have major impacts upon the current and future value of the stocks issued by the unified entity that results.

When company sells some of its assets to create an independent company, this is referred to as a spinoff.

Corporate actions are agreed upon by a board of directors in a firm. In general, there are three types of corporate actions: mandatory, voluntary and with choice.

Mandatory corporation actions are when all shareholders of a stock a required to partake in the action, such as a cash dividend. Voluntary actions are when shareholders elect to take action, but the board must agree to process the transaction. Although a choice corporate action is mandatory, shareholders are given many options.

 

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3 Responses to “What Is” a Corporate Action?

  1. bpfjr says:

    At XSP, we refer to “at choice” corporate actions as “Optional” events. There are many many more corporate action event types in today’s marketplace such as Rights Issues, Cash Stock Options, Reorganizations and more. XSP (& XSPrisa) automates the end-to-end processing of over 90 such event types for our global clients.

  2. A great description of the importance of corporate actions and the impact they can have on both the company and the investor. For so long corporate actions have been seen as a back office function, managed and tracked by the corporate action department. However, as is so clearly indicated in this article corporate actions can, and do, have significant impact on the investor and shareholder value. The decision taken, in particular for choice and voluntary corporate actions impact the share price the value of the company and a fund or portfolio weighting. Is it not time to bring in the front office when looking at corporate action technology. It’s not just about processing ‘Optional’ event. There’s the decision impact analysis, change in value and impact on the fund or portfolio. Having the ability to run this type of analysis before making a decision will help to determine what’s best for the Investor and in the long run the company. Running these scenarios before submitting that decision will help to make sure it’s the right one.

    • Kevin Cullen says:

      Good point, Gerard. Corporate actions is no longer (if it ever was) just a back-office issue. Having the capability to trade on real-time postions provided by new technologies that incoroporate timely and accurate data is fundamental for the front-office.

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