Klein, Coffee and Partnoy's Business Organization and Finance, Legal and Economic Principles, 11th (Concepts and Insights Series) by William Klein & John Coffee Jr & Frank Partnoy

Author:William Klein & John Coffee Jr & Frank Partnoy [Klein, William]
Language: eng
Format: azw3
ISBN: 9781599414492
Publisher: West Academic
Published: 2010-04-26T04:00:00+00:00

240

Chapter 4

BASIC CORPORATE INVESTMENT DEVICES: ECONOMIC ATTRIBUTES AND FORMAL CHARACTERISTICS

I. INTRODUCTION

In this chapter we will examine terms or concepts that define the basic elements of what is called the financial structure of a corporation. The principal focus is on the two classic and most common investment devices, common stock (equity) and bonds or debentures (debt). (Compare Chapter 1, Sec. II(E), discussing debt and equity.) A certificate of common stock is a piece of paper that is tangible evidence of a set of rights, interests, or claims in an incorporated business. It can be thought of as a short-hand expression or symbol for all the rules determining the common shareholder’s position in relation to the basic elements that are the bedrock of business organization: risk of loss, return, control, and duration. The same can be said of the piece of paper that we call a bond or debenture. In this chapter we are concerned with the content of financial instruments (common stock and bonds, and certain other instruments such as preferred stock, options, and warrants) and the language and concepts that people use to describe that content. In the next chapter we will begin with an examination of basic principles used in valuation of financial instruments or other assets. Some readers may find it helpful to read that material (in Sec. I of Chapter 5), at least quickly, before starting Sec. III of this chapter. In Chapter 5, following the material on valuation, we will examine the determinants of the relative amounts of debt (bonds and related instruments) and equity (common stock and related instruments) that will be used in financing the business.

Before proceeding, a word of warning and reminder is appropriate. We have already seen (see, especially Chapter 1, Sec. II(G) and Sec. XIII(B)) that simple debt and simple equity are polar cases and that virtually infinite variations are possible as we alter the classic provisions of each type of claim. In this chapter we focus on the classic terms of bonds and common stock, but we must remember that those terms can be varied to suit the needs, tastes, or whims of investors. In fact, a significant number of intelligent, experienced, creative, and highly compensated people spend much of their time in activity that some might think of as fashioning and marketing new financial products. One can also think of their role as finding new ways to define the rights, interests, or claims of the various participants in an economic enterprise—a role much like that of a lawyer who reworks and refines a 241

partnership agreement, a buy-out agreement, or any of the many other agreements defining business relationships.

One final point deserves emphasis. When we examine common stock, bonds, and other securities, particularly in this chapter, we work with abstractions. What is ultimately important, however, is how economic forces and legal rules affect individual human beings. Equity interests in public corporations are held directly by individuals or for their benefit by mutual funds, pension funds, insurance companies, or other intermediaries.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.