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That would only be strictly true if the company is trading at 1x book value, which is rarely true. If the company is trading at a high multiple of book value, t

That would only be strictly true if the company is trading at 1x book value, which is rarely true. If the company is trading at a high multiple of book value, then issuing more shares means that current shareholders get a smaller stake in the ultimate payout, in return for a relatively small increase in current assets, which almost certainly reduces share price. As any startup founder knows, the art is to issue just enough shares to fund the company to grow to success -- and in fact, to do this in stages, each time issuing only enough shares to make it to the next milestone. In practice, for large companies, the quantity of shares issued is generally small and gradual enough that any dilution is factored in gradually to the share price.

pedrocr 12y ago
I think in this discussion two things are being confounded: 1) The mechanism by which you move money in/out of a company. At the moment of the transaction you add/remove X$ in cash to the company and add/remove the same X$ in shareholders. You could turn around and use that same cash to do the opposite transaction and be back to square one. That's what I mean by the transaction being neutral to shareholders. 2) The situations in which you are incentivized to do these share issues/buybacks and their long term impacts. If you believe that your company is currently valued at Y but is really worth 10Y then you want to raise as little as possible to get a bigger share of that 10X increase in value. Conversely if you think your share is overpriced you want to raise as much as possible because you are paying it with inflated shares. The transactions themselves are neutral to the shareholders at that point in time, they're just ways of moving cash in/out of the company, you do them more or less and in one direction or another depending on your evaluation of how mispriced the company is.

pedrocr 12y ago

I think in this discussion two things are being confounded: 1) The mechanism by which you move money in/out of a company. At the moment of the transaction you add/remove X$ in cash to the company and add/remove the same X$ in shareholders. You could turn around and use that same cash to do the opposite transaction and be back to square one. That's what I mean by the transaction being neutral to shareholders. 2) The situations in which you are incentivized to do these share issues/buybacks and their long term impacts. If you believe that your company is currently valued at Y but is really worth 10Y then you want to raise as little as possible to get a bigger share of that 10X increase in value. Conversely if you think your share is overpriced you want to raise as much as possible because you are paying it with inflated shares. The transactions themselves are neutral to the shareholders at that point in time, they're just ways of moving cash in/out of the company, you do them more or less and in one direction or another depending on your evaluation of how mispriced the company is.