Disadvantages of Issuing Stocks & Bonds

Disadvantages of Issuing Stocks & Bonds
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Companies can raise money in two ways: by issuing shares of stock or bonds. Shares of stock are essentially portions of the company, with holders granted a right to the company&#039;s profits and, in some cases, to cast votes regarding the company&#039;s direction. Bonds, in contrast, are portions of loans which the company promises to pay back over time. While often advantageous, there are a number of disadvantages to issuing stocks and bonds.

Loss of Control

When a company issues stocks and bonds, it is essentially relinquishing partial control of the company to outside parties. Stockholders now own part of the company, allowing them to vote on certain issues and become a powerful voice in discussions as to how the company is run. Whereas before, control of the company was localized to a few owners, it is now widely dispersed among a number of people.

Asset Disclosure

In most countries, including the United States, companies that choose to issue stocks and bonds must abide by a number regulations related to the disclosure of financial information. Companies that issue stock must send out quarterly reports disclosing their businesses&#039; financial health, whereas organizations that issue bonds must offer a large amount of information related to the purpose of the bond as well as corporate assets.

Takeover Potential

Companies that issue many shares of stock face the risk of being taken over. If a shareholder is able to purchase a majority of voting shares, he effectively controls the company. In an attempt to secure a company&#039;s future, the business&#039; original owners may instead lose it the business altogether. Issuing bonds, however, does not carry this risk.

Loss of Value

A company that issues shares or bonds opens itself up to a public evaluation of its value. In terms of shares, a company&#039;s market value can be determined by multiplying the number of shares by the price of each share. A sudden drop in the price of a company&#039;s shares or bonds can signal a lack of investor confidence, precipitating a collapse as occurred with the investment bank Lehman Brothers in 2008.

Responsibility to Stakeholders

Both stockholders and bondholders have a stake in the company&#039;s success, making them powerful stakeholders. Whereas before, a company&#039;s main responsibility was to its employees, its customers and a few owners, the company must now attempt to satisfy the demands of those who hold its debt and shares of stock. This can change the focus of the company away from planning for the future towards satisfying its current bond rating and stock price.