A fourth reason is that 100 debt financing does not

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A fourth reason is that 100% debt financing does not result in a lower cost of capital for a firm, and most categories of debt impose restrictions on a firm – covenants. Covenants set out what a firm can and cannot do. The activities of a firm have to be monitored and debt owners must be able to enforce their covenants. Thus, debt will increase transactions costs for firms acquiring capital in this form. Government rules must be in place together with a legal system that reduces the costs of enforcing debt contracts. A fifth reason to go public includes diversification and estate planning . A founder of a private company might have most, if not all, of her/his wealth tied up in the company, as appears to be the case with Lakshmi Mittal. To diversify her/his wealth, the owner might sell some of her/his shares and invest the proceeds in other financial assets.154 Again, as you learn in finance courses, there are advantages in diversifying one’s portfolio. Diversification enables an individual to reduce the risk profile of her/his portfolio without necessarily sacrificing any return on the portfolio. At least this is the theory. The concept of diversification also has interesting implications for risk-taking by senior management and for corporate governance.155
From an estate planning perspective, there might be tax advantages in distributing one’s wealth to children and other beneficiaries over time rather than at death. A sixth reason to go public relates to OPM – using other people’s money to enrich oneself. If I own 100% of a company, then whenever I pay myself some perk (e.g. the use of a private jet, access to an exclusive box at the local stadium, a “night out on the town”, the use of a condo in London – the real one), I am simply taking money out of one of my pockets to put it into another pocket. Of course, there might be some tax advantages in the process, so taxpayers are picking up part of the costs for my enjoyment. When I sell a significant stake in my company, someone else is now picking up part of the costs of these perks. For example, if I now own only 10% of a company, then someone else is picking up 90% of the cost of any perk I receive. This creates strong, non-tax driven incentives, to acquire private jets, condos, limos, etc. Agency Definition Problem – aligning interests Compensation and incentives Agency – hedge fund managers, ad agencies, financial advisors (robo advisors), investment banks, lawyers, management consultants, compensation consultants, credit rating agencies, auditors, insurance brokers, etc. There is an agency problem when going public. The CEO is the agent of the shareholders. He is suppose to do what's in the best interest of shareholders Dealing with the agency issues is by providing incentives and compensations Separation of ownership and control Management and control by founder or founding family (dual share structure) Control/power Maximize personal wealth OPM Independent management, no controlling shareholder Maximize personal wealth

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