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.