Executive Summary
Corporate action information plays a critical role for many international firms. The demand for aggregating and delivering accurate corporate actions continues to grow, and while the quality of data has improved over the years, there is still room for improvement. This guide takes an in-depth look into Corporate Actions, providing an insight into corporate action types, why it is essential to the financial services industry and how it impacts investors.
What are Corporate Actions?
Corporate actions are activities initiated by a company, usually approved by a board of directors and sometimes by a meeting of shareholders. It can have a material impact on an organization, affecting various stakeholders like shareholders. Corporate actions can be of many different types, including, but not limited to, dividends, stock splits, mergers, acquisitions, and corporate spin-offs.
EDI’s Worldwide Corporate Actions Service (WCA) is a cost-effective information source that keeps customers up to date. Since its launch in April 2002, Exchange Data International (EDI) has continuously developed the service to meet evolving client needs. In 2008, EDI concentrated on strengthening its corporate actions service by widening its security coverage to structured products and covered warrants. Also, EDI has added bonds that trade like equities. This means that if a security is a bond but treated and settled as equity it will be included in our equity offering.
WCA covers 45 crucial events and aggregates corporate actions from over 150 exchanges worldwide. These datasets can be customized to meet specific client needs and delivered directly to the back, middle or front office, ensuring straight-through-processing (STP) with quality data that is reliable, relevant, and delivered promptly.
Institutions require timely corporate actions. This is to give them sufficient time to notify their clients, who in the case of voluntary corporate actions, might need to make a decision to accept or reject the proposed action.
Why are Corporate Actions Important?
Corporate actions are a critical resource for all financial services companies. These actions can have a huge impact on share prices and can convey the company’s state to the shareholders. Corporate Actions can enable capital raising, business rescues, and the smooth functioning of a company.
Jonathan Bloch, Exchange Data International CEO said, “Corporate Actions are critical to the smooth functioning of the financial sector. Without timely and accurate corporate actions portfolios will be mispriced, shareholder votes will be missed and reconciliations will fail. EDI’s Corporate Action service covers all equities worldwide and is used by countless firms to give them the comfort of knowing that they are up to date with the latest accurate corporate actions.”
Types of Corporate Actions
Differences Between North American Exchanges and the Rest of the World
Dividends can be declared by a company in either cash or stock, which is essentially a share of the profits being paid to shareholders and is typically paid at specific periods throughout the financial year.
- Cash dividends are when a shareholder is paid a specific amount of money per share owned. For example, a cash dividend of $2.00 per share is paid and if an investor owns 50 shares, the investor will receive $100 in cash.
- Stock dividends are when a shareholder is paid in the form of shares instead of cash. For example, if a stock dividend of 10% is paid and if an investor owns 50 shares, the shareholder will therefore receive 5 additional shares which they can choose to hold or sell.
Market data vendors around the world usually announce the ratio of how many extra shares a shareholder will receive per share held. This is not the same share ratio that is adopted by North American Exchanges. EDI recognized this can cause confusion and has subsequently implemented the same logic as applied by other exchanges for consistency.
Mergers and Acquisitions take place when separate companies combine into a single entity, but how this is achieved differentiates the two. Mergers occur when the parties involved combine through agreed terms where one company will usually surrender its stock to the other. On the other hand, acquisitions occur when a party buys the majority stake of another company.
Rights Offering (Issue) occurs when a company issues an offering of additional or new shares to existing shareholders based on their current holdings. Shareholders are given the option to purchase the shares being offered, at a fixed, reduced price prior to the expiration date, or sell the rights in the open market if they are transferable.
A spin-off occurs when a listed company sells a portion of its assets or distributes additional shares in a separate (subsidiary) company to create a new independent company. Spin-offs can indicate a company is preparing to grow their existing business or take on new challenges within the market, take Ferrari N.V. and Fiat Chrysler in 2016 for example. Spin-offs announced on North American exchanges are added into the EDI WCA database as Demerger events.
Stock splits occur when a company divides the value of its outstanding shares. Two-for-one stock splits, for example, is when the owner of a single share automatically becomes the shareholder of two shares where each share is at half the original stock’s value.
Spinoffs and Reverse Stock Splits
In EDI’s WCA database, Spinoffs are reported on North American exchanges as Demerger events and Reverse stock splits are treated as Consolidation events. In both events, the ratio in the database is the same as announced by the issuers.
Reverse Split Example
In a two-for-one reverse split a shareholder of two shares will only own a single share but at double the former price per share.
Who Needs Corporate Action Information?
As mentioned earlier, corporate actions can potentially generate material changes that impact an organization’s stakeholders and shareholders. This means any organizations, quantitative trading analysts, back-testers, model builders, or individuals that deal with investment securities such as shares, ETFs, or corporate bonds require corporate action information. For example;
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How EDI Can Help
EDI’s multi-award winning Worldwide Corporate Actions database service is a versatile, timely, and cost-effective solution. Our team of specialists delivers customizable datasets, tailored to your specific needs, through a range of delivery mechanisms to become your market data provider of choice.
As one of the first ISO 15022 compliant vendors to launch a Corporate Action Messaging feed in 2006, WCA clients have the opportunity to reduce the number of feed handlers in their system and subsequently minimize operational costs while maximizing efficiency. EDI’s WCA datasets are updated four times a day, ensuring the information’s prompt arrival and is delivered in a proprietary format (CSV, tab-delimited), ISO-15022 compliant feed format, or via an API.
