Question

Assume you own stock in a company, and you are in the process selling the stock to another investor. Since the transaction will occur between the buyer and the seller, the company will receive no direct cash flows as a result of the sale. Why should the company's management care about the price you get for your shares if the company does not receive any direct cash flow from the transaction?

Answer 1

The transaction price becomes the share price and as management's incentive and stock option value is linked with the performance of the stock they are concerned with the share price. Also if management were to sell their personal shares this transaction price is the price they will get If the conpany decides to raise new funds through issue of stock, transaction price serves as a reference. Hence, their coat of equity is dependent on transaction price and hence the value of the firm is dependent on transaction price. Also to attract potential investors for fresh funds, the stock should offer good returns which is caprured through dividends and share price or transaction price. Additionally, if the management were to sell the company the valuation would depend on transaction price.