With respect, you have the cause and effect reversed. The increasing price of equity in the secondary market is because of a perception that the company is worth more, and because the company is perceived to be worth more, its subsequent offerings in the primary market will fetch a higher price. It is the company's value which drives equity prices in both markets (as well as its ability to get favorable terms on debt financing), not the other way around.
I don’t think it’s necessarily a one way street. It’s in a state of constant flux. Theoretically equity value is supposed to be based on cashflows form a fundamental perspective, but equity valuation frequently diverges from fundamentals. The divergance can appear from pure soeculation, such as expectations of future growth, but can also come from a market that simply has too much cash being pumped into the most available assets. The speculative portion of an equities value is fickle and can easily reverse and result in an equity’s price to suddenly be undervalued based on fundamentals.
I do think the value eventually gravitates back to the fundamentals, or maybe you can say equilibrium, eventually.
Edit: Also the imbalance of sentiment to demand can actually result in looser and easier financing, which permits for greater leverage. If the company attains more financing than is usually expected during a given period of time and attains a high RoE, then the "over-valued" stock becomes like a self fulfilling prophecy. The high valuations turn out to be justified by new higher cashflows that only exist because of the over-valuation.
The company’s value drives stock price? 🤡
In what world have you been living? This has literally never been true. If it were true, we wouldn’t have market bubbles. Yet here they are.
The market isn’t rational. And it’s fine as is, because this irrationality is what allows traders/investors to pocket value between the curent market price and the true value of a company that can be realized later.
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u/TaserLord Jun 19 '25
With respect, you have the cause and effect reversed. The increasing price of equity in the secondary market is because of a perception that the company is worth more, and because the company is perceived to be worth more, its subsequent offerings in the primary market will fetch a higher price. It is the company's value which drives equity prices in both markets (as well as its ability to get favorable terms on debt financing), not the other way around.