Abstract
The corporation is the major institution for private capital formation in our economy. The corporate firm acquires funds from many different sources to purchase or hire economic resources, which are then used to produce marketable goods and services. Investors in the corporation expect to be rewarded for the use of their funds; they also take losses if the investment does not succeed. The study of corporation finance deals with the legal arrangement of the corporation (i.e., its structure as an economic institution), the instruments and institutions through which capital can be raised, the management of the flow of funds through the individual firm, and the methods of dividing the risks and returns among the various contributors of funds. The goal of corporate management is to maximize stockholder wealth. A major societal function of the firm is to accumulate capital, provide productive employment, and distribute wealth. The firm distributes wealth by compensating labor, paying interest on loans, and purchasing goods and services and accumulates capital by making investments in real productive facilities. The goal of corporate finance is to maximize the firm’s stock price. We will discuss management-stockholder relations. We will discuss, in considerable detail, socially responsible investing and the firm. Companies can “do good while doing good.” However, we firmly believe that management creates its corporate investment, dividend, research and development, acquisitions, and debt policies to maximize the stock price, which maximizes the market value of the firm.
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Notes
- 1.
Risk is used here in its broader sense to include the problems of uncertainty and not in its more precise definition, where it includes only those phenomena whose probabilities are reasonably known and which therefore can be insured against.
- 2.
Even where resources may be more abundant the costs of testing or obtaining statistics should be weighed against the degree of certainty likely to be obtained. This concept as first elaborated by Abraham Wald, e.g., “Basic Ideas of a General Theory of Statistical Decision Rules,” Proceedings of the International Congress of Mathematicians, Vol. I, 1950, has led to the development of sequential analysis and sampling techniques.
- 3.
This differs in degree from the error or risk in forecasting demand. In this case, it is the characteristics of the production function that are uncertain.
- 4.
Although risk, income, and control can be divided in almost any manner in the various stages of single proprietorship, general partnership, and limited partnerships, combined with various short-run creditors, mortgage holders, and term loans, the corporation formalizes and illustrates these relationships better than the other business organizations. For this reason most discussion of financial structure uses examples from the corporate form. The flexibility of the corporation as a financing device is practically unlimited.
- 5.
The owners’ position of control and greatest risk might be compared to a captain of a ship. In case disaster forces abandoning the vessel, the captain is traditionally the last person overboard. This tradition probably evolved as a result of the captain’s control over operations, for the vulnerability of his position (the greatest risk-taker) ensures that he will direct the ship in the most responsible manner unless, of course, he is irrationally bent on self-destruction.
- 6.
Economic theorists allow for risk as a cost. But the problem is more often recognized than discussed.
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Guerard, J.B., Saxena, A., Gultekin, M. (2021). Introduction: Capital Formation, Risk, and the Corporation. In: Quantitative Corporate Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-43547-9_1
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