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.