Reading 21: Investors and Other Stakeholders

Book 1: Corporate Issuers

Equity holders have a _______ claim to the company’s _____________.

residual, net assets

What kind of liability do debtholders and equity holders have?

limited liability

How does leverage affect ROE?

Leverage increases ROE AS LONG AS the expected ROA is greater than the cost of debt

• Leverage increases the returns attributable to equity without changing the equity base

• We don’t use ROIC because ROE measure the return on all assets, including cash

Why do debtholders want to take on as much risk?

They want the company to remain solvent so they can get paid on their interest

Why do equity investors want to take on more risk?

There is potentially unlimited upside to an investors return

Shareholder Theory

the primary focus of corporate governance is the interests of the firm’s shareholders

Stakeholder Theory

considers conflicts among several groups that have different interests

Who are public debtholders?

Bondholders

Who are private debtholders?

Banks, credit facililties

What’s different between private and public debtholders?

Private debtholders may rely on nonpublic material information

Inside Directors

work for the company they are on the board on

Independent Directors

don’t have a material relationship with the company

One-Tier Board Structure

inside and independent directors serve on a single board

Two-Tier Board Structure

independent directors serve on a supervisory board that oversees a management baord comprising of inside directors

Staggered board

only a fraction of the board is elected each year

Why should shareholders and debtholders care about ESG?

regulatory changes

Potential loss of customer goodwill and monetary fines

Young investors value ESG when investing

Negative Externalities

when a company or its investors do not bear the cost of their actions (environmental changes)

Physical Risk

damage of inputs or raw materials

Transition Risk

regulatory changes from switching from high-carbon to low-carbon

Stranded Assets

resources that become unavailable due to transition risk

Who holds the most risk when facing environmental factors—debtholders or shareholders?

shareholders