Stock Market Reactivity affects on BP

The Stock Market was formed many centuries ago.  It enables government and industry to raise long term capital through the buying and selling of securities from investors.  As well as enabling companies to raise funds it also helps the allocation of resources, better facilitation of mergers, can improve corporate behaviour, status and publicity.  It also benefits shareholders by giving them quick access to the value of their shares or to sell their shares (Arnold, 2008).

There are arguments for how efficient the market is.  Warren Buffet Argues the market is weak, Benjamin Graham thinks it is semi-strong and Kendal believes it is random. ‘Fama defined an efficient market as one in which prices always “fully reflect” all available information’ (Jarrow & Larsson, 2012).  It is not usually possible to have a strong efficient market as information not available to the public can not be taken into consideration by public investors.  All arguments relate to how much information about a company is known at that time. The number of ways in which investors can access this information has improved greatly due to technology. Investors will use different types of access such as newspaper or internet. Depending which source they use will depend on how quickly they can react to information about their company,

BP saw a dramatic decline in share price between 20^th April 2010 and 25^th June 2010.  In this period share price fell by 350.8p leaving shares worth less than half their value by June 2010.   This was most likely caused by the BP Oil rig explosion which killed 11 people and caused an oil spill on 20^th April 2010.  It is said to have cost BP at least £3.8bn. 

Since this disaster BP has not managed to recover its share price.  The last fluctuation occurred on 25^th October 2011 when BP announced a new Chief financial officer and that it had made 3^rd quarter profits of $4.9m.

It took investors over one month to fully react to the oil spill.  This may have been due to the ongoing nature of the disaster of which people did not know the full extent of straight away.  Some investors may have been holding onto their shares in the hope the spill could be recovered quickly and the share price would not be dramatically hit.  However this was not the case.  Therefore BP would appear to operate in a semi-strong market as share prices reflect when new information was released to the public.

What is the best objective for Companies?

There are many different objectives a firm can aim towards achieving. The three most used objectives are shareholder wealth maximisation, profit maximisation and stakeholder approach. But is any one of these objectives better than another?

Shareholder wealth maximisation is an objective available to companies.  This aims to increase the wealth of shareholders by increasing share prices or paying back regular dividends as a reward for their investment.  By selling shares companies can raise vast amounts of funds very quickly.  In the long term these funds would be used to invest within the business to increase future share prices and growth.  In the 1990’s business models began to change toward an equity culture which encouraged faster share price growth.  According to Adrian Blundell-Wignall one factor which led to the economic crisis was global macro liquidity policies and there poor regulatory framework. The economic downturn decreased shareholder and stakeholder value.  Kristen Gribben of the financial times said in 2010 that more investor rights and legislation is giving more power to shareholders and that these shareholders are demanding quicker returns.  This can lead to short-termism as investors are not loyal and will sell shares and invest in other companies if they think they will get a better return. Martin Wolf stated in January 2012 that incentives given to managers to align their interests with that of shareholders may also risk the long term health of a company.  Bloomberg Business Week identified that visionary companies are the ones excelling in the current economy and these companies are ones which put maximising shareholder wealth as a low priority and instead focused on their identity and drive for progress which enables them to adapt to change.

Shareholder Wealth is still an objective of many firms as it is argued it is better than stakeholder approach and profit maximisation.  Firms which do operate shareholder wealth objectives may do so as it gives them access to large amounts of immediately available funds. The management are taking no financial risk themselves as all the risk is on the shareholders. Using shareholder wealth approach firms can have a more long term view as the company can become more competitive which can have positive social affects as the companies grow and they employ more people which boosts the economy.

But what about profit maximisation and stakeholder approach?  It could be argued that profit maximisation is always an objective of a company otherwise the company would not have been formed and all businesses require money to be able to keep trading.  This approach encourages investment, reinvestment and growth.  It is not necessarily considered an ideal approach as the company will aim to maximise income and decrease costs which may not be in the best interest of stakeholders.  The problem with the stakeholder approach is that there are so many different stakeholders with varied interests it is very difficult to make decisions which will benefit all stakeholders.  Therefore another objective is required to resolve this problem which is when companies are likely to look at choosing the option which maximises profits or will benefit shareholders.  Therefore stakeholder theory can rarely exist on its own. 

There is not necessarily one approach which is the best for all companies worldwide as they all require different amounts of capital, have different management objectives and operate in different market sectors.  Often more than one of the above objectives will be implemented by a firm. This shows the complex environment businesses now operate in and the firm have to choose the objective(s) they think the firm should use to enable them to be competitive.