Equity Finance And Debt Finance

823 WordsApr 17, 20164 Pages
Stockholders are those entities who provide a company with the risk capital such as preference share owners and ordinary share owners (Freeman and Reed, 1983). Generally, stockholderis one of long-term finance providers with the aim to maximize their wealth.According toBrickleyet al. (1985), long-term finance providers are more likely to focus on the matter whether the financial structure in the company is sound or not and the durability of profitabilityrather than temporary profits that a potentially risky financial structure may bring. In addition, different company will encounter different problems when changing their capital structure. This part therefor mainly focus on equity finance and debt finance in small and medium-sized enterprises (SMEs) and listed company. From the perspective of stockholders, debt finance may be more attractive compared with other financial approaches. The reasons are as follows. Firstly, it may ensurestockholders’ ownership unchanged (Mooij, 2012). If the board of the company intend to adopt the approach of equity finance such as issuing new rights, there is a possibility that the former stockholders may not be able to purchase all new issuing rights and then lead to dilution of control which they do not expect. Secondly, debt finance is a relatively cost-effective method as there is tax advantage of debt.If a firm only has equity finance, an extra tax then needed to pay because dividends which come from profits are income for investors which

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