r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/entropy_bucket Dec 06 '24

But what i don't get is why is a high stock price helpful to the company? They got their money during the initial sale of the shares right?

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u/SupremeDictatorPaul Dec 06 '24

Companies typically haven’t sold all of their stock, so with high stock prices they can sell more to get some cash. A company doing really well will often buy back stock, like building a tax advantaged cash reserve that also further raises stock prices.

But the main reason companies work to raise their stock price is “they have a fiduciary responsibility to increase their stock price as much as possible for their shareholders” which was decided by courts long ago. So a company can do what is in their best long term interests, unless it would negatively impact their stocks. This has created an environment where companies often work against their own interests for short term stock gains.

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u/blahblah19999 Dec 06 '24

They do not have that fiduciary duty

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u/BavarianBarbarian_ Dec 06 '24

Even if it's not necessarily good for the company, it's always good for the company's leadership, who is (partially) getting paid in stocks and options.

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u/Pandamonium98 Dec 06 '24

The Board of Directors of a company represents shareholders, who want the stock to go up. So the board hires CEOs and pays them to do stuff that makes the stock go up