Stakeholder Interests in Capital Structure Decisions

Stakeholder Interests in Capital Structure Decisions | CFA Level I Corporate Issuers

Welcome back! In this article, we’ll conclude our discussion on capital structure by examining stakeholder interests in capital structure decisions. Let’s dive in.

Stakeholder Perspectives on Capital Structure

We’ll be examining the perspectives of various stakeholders when it comes to capital structure decisions. These stakeholders include:

  • Public debt holders
  • Common stockholders
  • Preferred stockholders
  • Controlling shareholders or private equity
  • Managers and directors
  • Banks and private lenders
  • Employees
  • Customers and suppliers
  • Government and regulators

Stakeholders on the left might prefer the company to take on more risk, while those on the right may prefer stability. Let’s look at the specific considerations for each stakeholder group.

Public Debt Holders vs. Common Stockholders

Public debt holders receive fixed interest with limited upside on company performance. In contrast, common stockholders can lose 100% of their investment in liquidation, but their upside is substantial if the company performs well.

This asymmetry creates a conflict of interest. Debt holders prefer less debt to limit risk, while common stockholders may prefer more debt for faster growth.

Preferred Stockholders

Preferred stockholders are similar to public debt holders as they have limited upside and receive fixed dividends. However, they face higher risk when the company takes on more debt, as they’re paid after debt holders and have lower priority in liquidation.

Private Equity, Controlling Shareholders, and Managers

Private equity and controlling shareholders have considerable influence in company operations, sometimes causing conflicts with minority shareholders. Similarly, some senior managers may have significant ownership or stock options, affecting their risk appetite.

Banks and Private Lenders

Banks and private lenders often have access to nonpublic information and work closely with management, allowing them to adjust debt terms or restructure if needed.

Employees, Customers, and Suppliers

Employees may have more to lose in terms of job security than potential gains from company performance. Customers and suppliers may be significantly impacted if the company goes under, depending on the nature of their relationship.

Government and Regulators

Lastly, government and regulators can set limits on debt proportions to protect consumers, industry, and the economy, with some companies being deemed “too big” or “too essential” to fail.

That wraps up our discussion on capital structure! Take a break, and we’ll see you next time.

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