By Bradford Cornell, University of California, Los Angeles, and Alan C. Shapiro, University of
Rapid growth poses special problems for financial managers. They must raise large amounts of
cash to fund this growth, often for risky and relatively young firms. Nonetheless, it is misleading
to speak of “financial management for growing companies” as if it were a special subject
unrelated to financial management in general. The ultimate goal of financial policy, whether a
company is growing or not, is to maximize the value of shareholders’ equity. In addition, the set
of financial instruments and policies available to a financial manager does not change just
because a company is growing rapidly. It makes sense, therefore, to examine the financial tools
available to all firms to boost market value before talking about the appropriate financial
strategies for growing firms.
Broadly speaking, there are two basic approaches for using finance to increase the value of the
firm. Both these approaches can be illustrated by thinking of the firm as producing a cash flow
“pie” — that is, total operating cash flow distributable to all investors (debtholders, stockholders,
and others). The first approach takes the size of the cash flow pie to be independent of financial
policy, so that the principal role of finance is to divide the pie into slices by issuing varying types
of securities. The object of this division is to match the securities’ characteristics with the desires
of investors so as to maximize the total proceeds from the sale of the securities.
The second approach focuses on ways in which financial policy can increase the size of the value
pie by affecting operating and investment decisions. Underlying this approach is the view that a
company is a complex web of “contracts” tying together disparate corporate stakeholders such as
investors, management, employees, customers, suppliers, and distributors. This approach
assumes that the firm’s future operating cash flow may depend significantly upon the perceptions
and incentives of the firm’s non-investor stakeholders. Financial policy can be used to increase
the size of the cash flow pie by strengthening stakeholder relationships — for example, by
improving management incentives or increasing the confidence of suppliers and customers.
The next two sections of the paper examine each of these approaches in greater detail. Once the
basic tools of financial management have been laid out, we turn in Section 3 to the issue of what
constitutes a growth company. Sections 4 and 5 address the main questions of the paper: How
are growth companies unique, and given these special characteristics, what financial
management techniques are best suited for such companies?
Slicing the Pie