Shareholders and lenders

• Shareholders and lenders both expect a firm to preserve and enhance the wealth they have entrusted to it.
• The returns shareholders and lenders expect are commensurate with the degree of risk they accept with those investments
• Dissatisfied lenders may impose stricter covenants on subsequent borrowing of capital.
• Dissatisfied shareholders may reflect their concerns through several means, including selling their stock.
• pension funds and mutual funds are examples of institutional investors
• Institutional investors often are willing to sell their stock if the returns are not what they desire, or they may take actions to improve the firm’s performance such as pressuring top managers and members of boards of directors to improve the strategic decisions and governance oversight.
• Some institutions owning major shares of a firm’s stock may have conflicting views of the actions needed, which can be challenging for managers.
• Conflicts occur because some may want an increase in returns in the short-term while the others desire a focus on building long-term competitiveness.
• Managers may have to balance their desires with those of other shareholders or prioritize the importance of the institutional owners with different goals.
• Clearly shareholders who hold a large share of stock are influential, especially in the determination of the firm’s capital structure
• shareholders who hold a large share of stock are referred to as

  blockholders
• the amount of equity versus the amount of debt used by a company to finance itself is called a capital structure
• Large shareholders often prefer that the firm minimize its use of debt because of the risk of debt, its cost, and the possibility that debt holders have first call on the firm’s assets over the shareholders in case of default.
• liquidation waterfall (who gets paid first in case of bankruptcy)

  1. bondholders
  2. preferred shareholders
  3. common shareholder
• why do preferred stockholders don't have voting rights like common stockholders if preferred stockholders gets paid first or is the priority in liquidation?

  • because common stock dividends are variable and not guaranteed, while preferred stock offers more predictable income stream
  • therefore, they sacrifice voting power in exchange for stability and priority in income distribution
• common stock fluctuates based on market demand and supply, preferred stock’s value is influenced by interest rates.