What is the benefit of stock market for the company?
- Thread starter enriquep
- Start date
Why you say that? sorry if it's a question too stupid for you, but I cannot understand why any owner will sell half or more of his company to the market if he know the company will profit much better in the future.
Actually is easier to see my problem:
If you have shares on Microsoft and you think the company will profit better in the future, you won't sell them, you keep them.
Why Bill Gates sold them then?
If you are interested, you can study Modigliani-Miller theorem.
In the world of no taxes and having same interest rates for everybody, how you finance the capital does not matter.
But in the world of taxes and preferential interest rates, it makes sense to lever up the firm.
https://en.wikipedia.org/wiki/Modigliani–Miller_theorem
They were awarded nobel prize for their study
In the world of no taxes and having same interest rates for everybody, how you finance the capital does not matter.
But in the world of taxes and preferential interest rates, it makes sense to lever up the firm.
https://en.wikipedia.org/wiki/Modigliani–Miller_theorem
They were awarded nobel prize for their study
But that theorem says in a real world is better to be levareged (selling debt):
"This means that there are advantages for firms to be levered, since corporations can deduct interest payments. Therefore leverage lowers tax payments. Dividend payments are non-deductible"
So again, why the companies chooses to raise capital by issuing stock instead of selling debt?
Yes. It is better to be leveraged to take advantage of deduction of interest payments. It does not mean they can go overboard. Leverage also increases bankruptcy probabilities. Think of this way, ideally it is better to have 99.99% of debt ratio (assuming they can issue debt at that level), since it maximizes firm value. But at that rate any slight mishap, firm will be bankrupt.
Firms try to balance this by trying to optimize structure of their capital. First they try to self fund, since it gives more bang for their buck, then selling debt and finally equity. Corporate finance is complex area by itself. There is lot of signalling mechanism also involved to issue which capital and how much to leverage and type of firm to project themselves.
Firms try to balance this by trying to optimize structure of their capital. First they try to self fund, since it gives more bang for their buck, then selling debt and finally equity. Corporate finance is complex area by itself. There is lot of signalling mechanism also involved to issue which capital and how much to leverage and type of firm to project themselves.
It was a legit question. When I watch Shark Tank, I often ask the same question. Why would they give up 20% of their little company for 100K, when they could just ask for a business loan from the bank?
The answer is that sometimes the bank is not willing to take the risk and they can't borrow in any other way...
Not necessary insolvent, just in need of a capital infusion, but yes, you can look at it that way. You with your trust and little money are backing the company.
Another reason for the IPO could be that early private investors are pushing for it because they want a pay day. That raises the question, why don't they just sell their private stock privately? I am not sure but an IPO probably brings in more money...
I won't call it gamble, when positive expected return is there for all parties on aggregate. Markets are in general is best way to allocate capital for investors and for company to raise capital in efficient manner. That doesn't mean there is no information asymmetry all around.
Company tries to issue equity when they think their stock is over valued or desperate immediate need of cash. Investors knows this and tries to extract maximum cost of equity (very much higher than cost of debt) and in return they get a call option with zero strike and very long expiry.