Cash Capital Increase Subscription and Stock Price Fluctuations: Market Reactions Observed from Real Cases of Tesla and TSMC

Cash capital increase is a common way for listed companies to raise funds from shareholders, but investors are often confused about why sometimes the stock price soars after a cash capital increase plan, while other times it drops sharply. What is the underlying logic behind this?

Reverse Engineering from Cases: How Does the Market Price Cash Capital Increases?

Tesla’s 2020 Cash Capital Increase: A Paradigm of Price Reversal

In 2020, Tesla announced a cash capital increase plan, proposing to issue new shares worth approximately $2.75 billion, with a price of $767 per share. Logically, a large supply of new shares should exert downward pressure on the stock price, not to mention diluting existing shareholders’ equity. But the actual situation was the opposite — the stock price did not fall; instead, it rose in the short term after the announcement.

The reason behind this is that investors were confident in Tesla’s growth prospects. At that time, the market believed that the funds raised would be used for global expansion and new factory construction, meeting the increasing market demand and driving future revenue and profit growth. In other words, the market was betting that the capital raised through this cash increase would create greater value for the company, enough to offset the dilution caused by the increased share supply.

TSMC’s 2021 Cash Capital Increase: Industry Leader’s Confidence Recognition

On December 28, 2021, TSMC announced a cash capital increase plan to raise funds through issuing new shares to further expand its business scale. The market responded enthusiastically, and the stock price rose accordingly. Unlike Tesla, TSMC, as the global leader in semiconductor foundry services, has relatively stable operational performance and financial results. Existing shareholders generally supported the capital increase plan and were willing to participate in the cash capital increase to maintain their existing shareholding ratio, thereby reducing the impact of new share issuance on the ownership structure.

These two cases reveal a key point: the impact of a cash capital increase on the stock price depends on how the market evaluates the efficiency of the use of these funds.

How Cash Capital Increase Works and Changes in Shareholder Rights

Analysis of the Capital Increase Process

Cash capital increase usually involves the following steps: the company’s decision-making team formulates a plan and sets the fundraising scale, then sends notices to shareholders, disclosing the issue price, number of new shares, and total amount. eligible shareholders can choose to subscribe and pay before the deadline. After accounting, the company issues new shares, and participating investors ultimately receive new share certificates.

Evolution of Shareholding Ratios

The direct consequence of a cash capital increase is an increase in the number of shares. Suppose a company originally has 10 million shares outstanding; a new issuance of 5 million shares would dilute existing shareholders if they do not participate. Their ownership percentage would decrease from 100% to about 67%. If the company’s performance does not improve, this dilution can become a negative factor.

Will the Stock Price Rise or Fall After a Cash Capital Increase? Three Key Factors

Scenarios Leading to a Price Drop

1. Oversupply. If market demand for the new shares is insufficient, the sudden increase in supply will create price pressure, leading to a decline in stock price.

2. Lack of market confidence. If investors doubt the purpose of the company’s capital increase or worry that the new funds will not generate expected returns, they may sell shares. This is especially true if the issue price is below the current market price, which can intensify pessimistic expectations.

3. Dilution expectations. If major shareholders or institutional investors do not participate in the cash capital increase, their control will relatively decrease, and the market may lower the company’s valuation accordingly.

Scenarios Leading to a Price Rise

1. Strong market demand. If investors are optimistic about the company’s prospects, the demand for subscribing to the new shares may exceed the issuance volume, pushing the stock price higher.

2. Clear and efficient use of funds. If the company clearly states that the funds will be used for high-return projects (such as R&D, expansion, acquisitions), the market tends to raise the company’s valuation expectations.

3. Strong support from core shareholders. When major shareholders, institutional investors, or management actively participate in the cash capital increase, the market interprets this as insiders’ confidence in the company’s future, often boosting the stock price.

The Significance of Cash Capital Increase for Enterprises

Advantages

The most direct benefit of a cash capital increase is helping the company quickly raise large amounts of capital for business expansion, new project investments, debt repayment, or strategic acquisitions.

Additionally, moderate cash capital increases can improve the company’s capital structure. Increasing equity reduces the relative debt ratio, lowering financial leverage risk, and improving credit ratings, which can reduce future financing costs.

Furthermore, cash capital increases are often viewed as positive signals by the market. They indicate that management is confident about the future and is willing to raise funds to bet on the company’s prospects, which can enhance investor confidence.

Risks to Watch Out For

The cost of a cash capital increase is the dilution of existing shareholders’ equity. Shareholders who do not participate in the subscription will see their ownership ratio and earnings per share decrease due to the new issuance. If the issue price is relatively low, the dilution effect will be more pronounced.

Moreover, market acceptance of the capital increase is uncertain. If investors are pessimistic about the company’s prospects or have doubts about the use of funds, the market reaction may be negative, leading to a decline in stock price.

Finally, cash capital increases involve issuance fees, underwriting costs, and other expenses, which can increase the company’s financing costs.

When Can Investors Receive the New Shares from a Cash Capital Increase?

After participating in a cash capital increase, investors usually need to wait for some time before obtaining the new shares. The specific duration depends on several factors:

Company’s Capital Increase Schedule: The company sets a subscription deadline. After completing the subscription accounting, internal processing takes place, which usually takes several weeks to months.

Exchange Approval: If the company’s stock is listed on a formal exchange, the new share issuance must be approved and registered by the exchange, with approval times varying according to exchange regulations.

Shareholder Registration Procedures: The company also needs to complete registration procedures for participating shareholders to ensure accurate ownership records.

During the waiting period, investors should continue to monitor company announcements and conduct in-depth analysis of the company’s fundamentals and industry prospects to make more rational investment decisions. A cash capital increase subscription is just one of many factors influencing stock prices; the overall profitability, market environment, and industry trends are fundamental determinants of stock price movements.