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Categorizing Corporate Actions According To Types

Aug 17, 2007
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 everyone involved in the company including the shareholders and the bondholders. Companies may or may not require 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. The following are some of the common corporate actions, which 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 as 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. 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.

Additional Corporate Actions: 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 for 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.

Additional Information
There are various software packages and information available that provide the necessary guidelines to educate the investors. These software packages are readily available at an economical price for the benefit of the investing community.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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