Unformatted text preview: n to bondholders (financial statements,
Specify accounting techniques (e.g., consistency with
Officers’ certificate of compliance: managers provide a
signed document stating that covenants have not been
14 Equity Financing
Three types of public equity securities
– Common stock
– Preferred stock
Common stock is a share of ownership in a corporation
that usually entitles the holder to vote in the firm’s affairs
Common stock holders are the owners of the firm
They are entitled to the firm’s profits after other
contractual claims on the firm are satisfied (e.g., debt
Common stock holders ultimately run the firm
15 Dual-Class Shares
Dual-class common stock: some firms have two classes of
common stock, usually called class A and class B, which
differ in terms of their votes per share
These firms where usually family-owned firms until they
grew too large to be financed by the family alone.
Because families did not want to give up control, they keep
the super-voting shares (usually not traded) and raise
outside equity by issuing shares with inferior voting power.
Thus, they obtain capital but keep full control of the firm
In this case, voting rights > cash-flow rights. Heavily
criticized by advocates of shareholder rights.
16 Benefits of Dual-Class Shares
They insulate managers from the need to meet short-term
financial expectations which can be detrimental to building
Founders reluctant to use debt financing use them as a
way to grow the company without giving up control.
With no takeovers to worry about, founders are more likely
to remain in charge and benefit shareholders with their
skills and expertise.
Entrepreneurship is encouraged by ensuring that founders
reap future benefits from their efforts, instead of sharing
them with subsequent shareholders.
Founding families also have an incentive to bequeath a
valuable asset to their offspring and rela...
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