Corporate Action

Loading the player...

What is 'Corporate Action'

A corporate action is any event that brings material change to a company and affects its stakeholders, including shareholders, both common and preferred, as well as bondholders. These events are generally approved by the company's board of directors; shareholders may be permitted to vote on some events as well. Some corporate actions require shareholders to submit a response.

BREAKING DOWN 'Corporate Action'

Corporate bondholders are also subject to the effects of corporate actions, which might include calls or the issuance of new debt. For example, if interest rates fall sharply, a company may call in bonds and pay off existing bondholders, then issue new debt at the current lower interest rates. Dividends, stock splits, mergers, acquisitions and spinoffs are all common examples of corporate actions.

Common Corporate Actions

A cash dividend is a common corporate action that alters a company's stock price. A cash dividend is subject to approval by a company's board of directors, and it is a distribution of a company's earnings to a specified class of its shareholders. For example, assume company ABC's board of directors approve a $2 cash dividend. On the ex-dividend date, company ABC's stock price would reflect the corporate action and would be $2 less than its previous closing price.

A stock split is another common corporate action that alters a company's existing shares. In a stock split, the number of outstanding shares is increased by a specified multiple, while the share price is decreased by the same factor as the multiple. For example, in June 2015, Netflix Inc. announced its decision to undergo a seven-for-one stock split. Therefore, Netflix's share price decreased by a factor of seven, while its shares outstanding increased by a factor of seven. On July 15, 2015, Netflix closed at $702.60 per share and had an adjusted closing price of $100.37. Although Netflix's stock price changed substantially, the split did not affect its market capitalization.

Mergers and acquisitions (M&A) are a third type of corporate action that bring about material changes to companies. In a merger, two or more companies synergize to form a new company. The existing shareholders of merging companies maintain a shared interest in the new company. Contrary to a merger, an acquisition involves a transaction in which one company, the acquirer, takes over another company, the target company. In an acquisition, the target company ceases to exist, but the acquirer assumes the target company's business and the acquirer's stock continues to be traded.

RELATED TERMS
  1. Adjusted Closing Price

    A stock's closing price on any given day of trading that has ...
  2. Shareholder

    Any person, company or other institution that owns at least one ...
  3. Mergers And Acquisitions - M&A

    A general term used to refer to the consolidation of companies. ...
  4. Common Stock

    A security that represents ownership in a corporation. Holders ...
  5. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  6. Common Shareholder

    An individual, business or institution that holds common shares ...
Related Articles
  1. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  2. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  3. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  4. Trading

    What If You'd Invested Right After Netflix's IPO?

    Find out more about how much you would have made if you invested in Netflix Incorporated right after its initial public offering, or IPO.
  5. Investing

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  6. Markets

    How Corporate Events Affect Stock- And Bondholders

    Investors tend to buy either stocks or bonds, but rarely choose between the two. Find out when you'll benefit from one over the other.
  7. Investing

    Understanding Stock Splits

    We explain what they are, the thinking behind them as well as their results.
  8. Investing

    Stock Splits: A Closer Look At Its Effects

    Most trades, including short sales and options, aren't materially affected by a stock split. Still, it's important for shareholders to understand how these events impact various aspects of investing. ...
  9. Investing

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  10. Investing

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
RELATED FAQS
  1. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Answer >>
  2. How do a corporation's shareholders influence its Board of Directors?

    Find out how shareholders can influence the activity of the members of the board of directors and even change official corporate ... Read Answer >>
  3. Does a stock dividend dilute the price per share as would a forward stock split?

    Every corporation has the same goal in mind: to maximize shareholder wealth. This goal is fulfilled in two different ways, ... Read Answer >>
  4. How does a stock split affect cash dividends?

    When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what ... Read Answer >>
  5. How does a merger affect the shareholders?

    Explore the effect of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  6. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center